In the year gone by, overseas investors made a net investment of more than USD 22 billion in the Indian equity market. However, Jitendra Sriram, MD & head of research at HSBC India feels hogging such a huge sum from FIIs in 2013 will be a herculean task for India if no concrete measures are taken on the policy and reforms front.
"This year will be all about how well we fair on fiscal numbers, earning numbers need to start seeing an uptick and investment climate needs to turn the corner," he added.
Meanwhile, IT giant Infosys will announce its third quarter earnings on Friday. According to Sriram, Q3 is a traditionally weak quarter for the Indian IT industry, given the weak rupee he is cautiously optimistic on the sector.
HSBC sees the Sensex touching 21,700 in this calendar year, which implies a 10-11 percent upside from the current levels. On specific stocks, the broking firm is bullish on ONGC, Sun Pharmaceutical Industries, ILandFS Transportation Networks, Hindustan Zinc and ITC.
Below is the verbatim transcript of an interview aired on CNBC-TV18.
Q: How do you feel about the market as we enter the earning season?
A: If I were to put it in a different context then it is like a student appearing for an examination. Last year was all about turning a corner, starting to get more serious so the sentiment rating or price to earnings (PE) rerating of India has happened. Now the marks need to improve. Therefore, to that extent this year is going to be how well we fair on the report card so, the fiscal numbers, earning numbers need to start seeing an uptick, investment climate need to turn the corner and to put it differently the whole issue is that the sentiment turn has happened. Now reality needs to turn. If we need to sustain the kind of flows and India did bag a disproportionate share of flows into Asia last year, out of the total 50 billion that Asia ex-Japan saw, almost 24 billion of inflow came into India. To hog such a disproportionate share is going to be a difficult task into 2013 and to do that the reality needs to improve. It cannot be only a case of sentiment turning the tide.
Q: How have you read the developments in terms of policy changes in oil and gas space and how are you approaching the sector?
A: I think oil and gas is one of the key areas where genuine improvements are happening. One can always debate whether the pace needs to be little bit higher or slower but the fact is that things have turned from September when diesel price increased
The way I would read it is maybe between 10-15 percent of the output is institutional sales, very simplistically put, anybody who does not fuel themselves from a petrol gas station probably comes under institutional category whether it is defense, railways, state transport corporation, marine applications. All those who have shipments delivered at their factory or workshops are going to be paying a market rate. So, there will be some amount of under recovery reduction, which especially given that it is in diesel, which is 50 percent of the overall subsidies, is definitely a positive move.
Q: How about Infosys tomorrow. How make or break it is going to be for the market sentiment or even for the sector?
A: This quarter is generally a slightly weakish quarter for Indian IT because of few working days during Christmas time. The other aspect is that the rupee has not had a material shift during the quarter. So, overall 2013 climate should be better than 2012. There is some room for cautious optimism given where the rupee is around 55 levels.
I do no think on Indian Rupee (INR) earnings technology sector should disappoint too much. Yes, dollar earnings maybe because of the US elections. People may not take decision around that time, which creates a negative sentiment on US corporate. So, a sluggish Q4 but one will see that process kick start again in 2013.
Q: What kind of influence do you see the diesel or fuel price hikes or even large consumer clusters being made to pay market rates for diesel having on inflation and in-turn on the Reserve Bank of India’s approach on January 29?
A: I would say on inflation, at the end of the day the economy as a black box pays the cost for it whether take the cost through higher government borrowing programme because of fiscal deficit or whether it is from a monetary aspect, anyway India is an importer of crude, we are buying it from the Gulf and undercharging consumers and as a result the system is anyways taking a stress. I do not think it is a material shift whether they hike the prices. Yes, one part is going to be that because of artificial aberrations to pricing given that it will have ripple impact because railway freight rates will logically move up, alternatively power tariffs move up because of tinkering with prices. There are also rumours of gas price increase and if that kicks in then power tariffs probably inch up. So, all those will have an impact.
I would say that from a monetary aspect it is not going to be a cycle hereon. Directionally one should see easing but it will be a start stop affair, it will not be a cycle in a sense we may have one rate cut now maybe a pause for sometime. So it will be a gradual slower process of cuts from hereon but it is not going to be like a reversal in the stance from the authority.
Q: Do you have top overweight at HSBC, going into earning season either in terms of a sector or stocks on the Nifty that you think will standout in earnings performance?
A: We have an index target of 21,700 for this calendar year which implies about 10-11 percent upside for the market. We are positive on names like ONGC, Sun Pharmaceutical Industries and ILandFS Transportation Networks in industrial space. We do like Hindustan Zinc in metal space. It is a bit of a blend of some defensives and aggressive as well. ITC is a name that we have liked in the past and we continue to like it hereon as well.
Q: A lot of people have started getting cautious on ITC and the price action recently has not been encouraging. Do you fear that the stock may have topped out?
A: I think some of the sheen coming off is because of various index rebalancing and as a result of some passive money rotating out of the stock. However, the core business continues to chug along nicely and we are not concerned about it from an operational perspective. Yes, short-term because of index passive money going out, could be a bit of an overhang on that name but from a longer term perspective we are excited about the story.