The Indian currency weakened to a two month low of 55.02/USD on Monday. However, brokerage house UBS Securities is not too worried about rupee’s movement at this point. “We are sure RBI will manage the volatility quite well. The market tends to give knee jerk reactions to data points and investors can take advantage of that,” MD & Head of Indian Equities Suresh Mahadevan told CNBC-TV18. He sees the rupee trading in range of 53.50-55.50/$ going forward.
He sees limited downside in the Nifty and is hopeful of the index being closer to the upper end of the 5,600-6,450 range by this year end. “We don’t see a huge downside for India as valuations are not stretched. Government’s intent on pushing reforms and fiscal consolidation makes us positive,” he said.
On specific stocks UBS Securities prefers Exide Industries over Apollo Tyres. Among midcaps, he is betting his chips on Federal Bank, Bajaj Electrical, Sun TV and Dish TV. His top pick from the telecom space is Bharti Airtel. Meanwhile, he doesn’t expect USD 1.6 billion impairment to impact Tata Steel materially.(Read More)
On the flip side, he is not upbeat on pharma player Ranbaxy Laboratories, which has pleaded guilty and has agreed to pay USD 500 million to resolve false claims allegations, CGMP violations and false statements to the FDA. (Read More). Dr Reddy’s Laboratories and Sun Pharma are his other pharma bets.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Let me start with Ranbaxy which is in the news this morning. It appears the stock might open weak but how would you approach it after the USD 500 million settlement?
A: In the pharma sector this is a name we are not very positive on, our analysts like most of the other names except Ranbaxy. It is partly to do with this but generally we prefer other names like Dr Reddy’s Laboratories, Sun Pharma, etc. over Ranbaxy.
Q: What about Tata Steel that is also in the news this morning because of the write down they had to take. Any material impact you feel for Tata Steel?
A: I don't think there is any material impact because this is non-cash; basically it is impairment of goodwill kind of a thing. However, in hindsight shows they may have probably over paid when they bought Corus. It obviously affects the book value.
Since the cash for this went out quite a while earlier, I really don't think this should have any material impact on the stock incrementally at this point.
Q: Yesterday’s trade deficit data seems to have worried the market. Do you think it has big implications for the currency and also for Indian macro in the eyes of global investors?
A: Crude and gold obviously affect the trade and hence the current account. Clearly, it seems like at a lower price; the demand for gold has actually gone up in India that is what the trade data really shows. I don't think it is really worrying. Our view is that the rupee should be in range of may be 53.5-55.5 that is what the fixed income guys are saying.
Our own economist thinks it will go to 56 over the course of the year and then as growth picks up, it starts appreciating a little bit. I don't think we are unduly worried about the rupee at this stage because I am sure the Reserve Bank of India (RBI) will manage the volatility quite well. We also had the consumer price index (CPI) print, which was at the margin positive. This knee-jerk kind of reaction to data points from the market is something perhaps the investors can take advantage of. But we are not too worried about the rupee at this level.
Q: What is the sales desk saying about flows?
A: Flows is something which is a very complex function of how the rest of the world behaves and as I must have mentioned earlier that this year Japan has been on everybody’s radar. A lot of funds have been underweight Japan so that is where a lot of the money seems to be going. Corporate America is in good shape so money is going there. To that extent the global emerging market (GEM) flows may not have done that well. And within that, India should relatively do well.
So, clearly we have a problem of soft data points right now but at the same time the government has shown some good intent with respect to fiscal consolidation. Even potentially some reforms around subsidies and potentially FDI. So if the government continues to use the Cabinet Committee on Investment (CCI) to clear projects, improve investment sentiment then India should be okay.
Q: You track some of the companies like Exide Industries but do you have Amara Raja Batteries under coverage too?
A: We don't cover Amara Raja but we cover Exide and we are quite positive on it at this point.
Q: What are your big recommendations from the midcap side at this point because it seems like in the last 10 days people have started to ferret out midcap ideas after the fairly significant run up that we have seen in large caps?
A: We like stocks like Exide Industries, Federal Bank, Bajaj Electricals. Some of the media names we like, Dish TV Network, Sun TV. These are some midcaps are probably at the top of the mind for us.
Q: The space that people are slowing growing positive on this time around is telecom; in fact that is probably going to give a little bit of extra to the earnings performance when we totted up. How are you approaching telecom and what is the best buy there?
A: We have been quite positive on the sector and probably we have turned positive little too early but things are falling in place for the sector. There are three fundamental changes which are happening in the sector.
One is less competition which is leading to some pricing power which this industry badly needs to have economically viable companies. Second is regulatory wise the government is loosing a little bit of power with two failed auctions and the operators are gaining at the margin. Third is data; data is growing 20-25 percent quarter on quarter from just through put basis and on a revenue basis 15-20 percent.
These three are very positive fundamental changes and within the space we like Bharti Airtel the most because it has been a big laggard. Our price target for the stock is Rs 420 over the next 12 months. We think the stock could rerate there primarily based on pricing improvements.
Q: The big disappointment last week was Jubilant Foodworks but not everyone was convinced by how bearish the commentary was from the management. What did you make of it and how would you call that stock now?
A: Jubilant is one stock where our midcap team has had a negative view for a while. It is finally playing out now. There view was based on volume growth disappointing at some point and that is what we have seen with the numbers.
It is a question of valuation and this is a secular growth story. Now what do you pay for it, do you pay 40 times or do you pay 30 times that is the question. We seem to think the fair value is closer to 30 times and on FY14 basis and not necessarily on FY15. So 30 times will make it closer to Rs 900-950 levels, is the fair value. However, if you want to take a leap of faith and want to put 30 times on FY15 numbers then you can pay like Rs 1250-1300.
We are in the camp where we still are negative on the name. We think there is a little bit more downside left. If the stock corrects from here we can look at it but our negative view has been somewhat played out to a large extent. There is some steam left on the negative side but this is a stock luckily we have got the call quite bang on.
Q: What are you telling your clients to do on some of these auto ancillary plays? You spoke about Exide but names like Apollo Tyres did not exactly come in with great numbers.
A: Exide is our best bet, we do cover Apollo Tyres but we prefer Exide at this stage. When you look at India as such, it has become very stock specific and within midcaps it is even more stock specific. On the auto ancillary names I would again say stick to Exide at this point.
Q: Your view on the market has been that it will range between 5,600 and 6,400 this year. From where we stand now around 6000 it is the midpoint of that range. Is risk reward still in favour of going up to 6400 in the near term or do you think the current rally means that the market probably needs to consolidate?
A: It is sometimes very difficult to predict how the market is going to behave in the short-term. However, as the year goes on probably we will end up at the higher end of the range. We are actually not very negative on India and even from a regional context India is one of the few overweight markets we have.
While, the data points may be disappointing that is also a reflection of the fiscal discipline we are undertaking. Essentially, what we really need to break out of this range on the upside; I would say is some administrative reform from the government. The CCEA has made a little bit of a beginning but it needs to really follow it up.
I did some meetings in Delhi last week and the signals we are picking up, the government may be quite serious on the CCEA stuff. Let us wait and see for the next couple of months how they go on with some of the environmental and forest clearances, and also the security that is defense type clearances. If that comes through then we could probably see a good recovery on the economic fundamentals, which should obviously start getting reflected in the market.
We don't really see huge amount of downside at this point for India particularly because valuations are not stretched, so that gives us comfort. At the margin, the government’s intent on fiscal discipline and pushing through some admin reforms actually makes us a little positive.
Q: There is just a couple of pharma names to go and then we would have rapped up earning season. On that valuation point you made what is your takeaway been of the earnings trend and any extrapolation that you guys are drawing for FY14 and whether there is visible signs of improvement?
A: Generally, this result season has not been way too disappointing. At the margin, around 68-69 percent of the companies have either met or exceeded our expectations. This is at the half way point of the a few days ago and we continue to see more results.
Next year consensus is that probably 15-16 percent earnings growth. We are very similar, may be there is a little bit of downside to that number if the whole recovery gets delayed a little bit. I don't think there is any big downside at this point.
The Q4 numbers to put it bluntly were not a negative surprise. In fact, marginally they may have surprised positively. Again these numbers some of them are backward looking. So, what is important for us to monitor is, what the government does particularly around elections. The intent has been good but now we need a little bit of follow up action.
Q: When you speak to some of the long only guys is that the sense you get that a trading call on India is fine but they are not that convinced by what is happening over the longer term?
A: In fact to the contrary, there are a lot of people we speak to really like the long-term fundamental story of India. Structurally, India is about consumption, infrastructure and a lot of other things, so people have no doubts about the structural story. In fact if you look at some of the consumer companies the way they are trading it is pretty clear that structurally people believe in India.
What some of the investors get frustrated by is they sometimes have unrealistic expectations on the speed of reforms and government action. I have in some form or the other followed the Indian market since 1995 and think that India at the margin probably disappoints on the pace and the speed with which the government moves. That is what sometimes disappoints people,
In our conversations with investors, a lot of people certainly believe in the structural story, which is built on demographics and economic evolution etc and I don't think anybody is questioning that yet. However, people do get frustrated with sometimes the speed with which our reforms are pushed through and the speed with which government acts.