Indian market is battling the bears on the back of slowdown in foreign funds and economic slowdown. Experts feel that equity market may face further downtrend if the government does not hurry up in taking policy decisions.
In an interview to CNBC-TV18, Rahul Singh, Head of Equity Research, Standard Chartered Securities warns that the government will need to take executive decisions in June-July else Indian market will only face risk. According to him, the Sensex is likely to be in the range of 18000-19000 in FY13.
Singh is also worried that India may not outperform even if Fed resorts to quantitative easing (QE3).
However, he feels that it is not yet time to ring the warning bells as fourth quarter corporate earnings have been mixed. "There have been some big disappointment, there have been some surprises but on the aggregate it has still been pretty much inline. Nothing to swing the needle one way or the other for the market," he added.
Here is an edited transcript of his comments. Also watch the accompanying videos.
Q: We are still early in earning season but what have you made of the preliminary trends? How are you feeling about earnings performance itself?
A: The result season has been pretty much similar to the previous one. It has been a mixed bag. Even within sectors, we have seen huge divergence, case in point being IT services. So in India, the result seasons for the past few quarters have been a mixed bag and we don’t see any difference this time. It is still very early.
We still have some largecaps yet to report. If you look at the aggregate numbers, there have been some big disappointment and some surprises but on the aggregate it has still been pretty much in inline. There is nothing to swing the needle one way or the other for the markets.
Q: Some of your peers have been expressing greater disillusionment about the course of the market for the next six months both in terms of how much the macro concerns have alleviated, individual stock levels and of course other issues like the currency. Would you say there is a higher risk now that we are headed for some kind of de-rating threat in the second half of the year?
A: Yes, I would like to without getting into the technical side of it. If you just step back a little bit and look at the fundamentals, the valuations move up primarily for three reasons, one is the risk free rate, the risk premium for India as well as the medium-term earnings growth outlook. On all those three counts there has been some setbacks starting with the risk free rate where even the rate cuts have not moved in the ten year G Sec yields as much down as was expected.
The risk premium seems to have crept up back again after the January-February period when there was some excitement on the reforms front. June-July is going to be critical once the Budget session is over.
You are right, from a valuation and earnings drivers’ point of view, at the margin there has been disappointment and setbacks. But if I look at it in the context of what is the earnings growth rate for our universe and what is the consensus factoring in, I don’t see a CAGR of more than 12% earnings for Sensex universe for the next two years be it our numbers or be it consensus. 12% earnings growth rate is lower than the nominal GDP growth rate.
I think the downside to earning numbers is now fairly limited. The driver, therefore, has to be valuations and that is where the risk free rate and the risk premium comes into the picture and the expectations are low. I would say yes, at the margin things have disappointed and there is a higher risk of a downtrend from hereon rather than an uptrend but let us watch out for June as well. Let us not totally write it off.
Q: So in effect what could your yearend target on the Sensex look like and given the kind of risks that you alluded to? Would you go ahead and change your targets at all?
A: The targets are in a broad range of 18,000 to 19,000. That is the end of FY13 target. The way we look at it is the market will either remain here at 13 times which is 10-15% discount to the long-term trading multiples, the chances of which have been increased.
I would say that chances of ending the year with an 18,000 index in March '13 has gotten higher than a 19,000 index which basically imputes an average P/E multiple of 14-14.5 times. That is because of all the reason I mentioned earlier in terms of the risk free rates and the risk premiums.
Q: If you map out the month of April then you see that FIIs have pulled out money in the month of April, this is the first monthly outflow that we have seen since the month of November. What kind of trends do you see from the FIIs front and when do you see a turnaround come about?
A: As I said, the excitement of January-February has ebbed significantly. The other realisation which is donning on the market is more fundamental. The structural issue for the Indian economy is that our leverage to a quantitative easing or a significant liquidity infusion in the developed markets to support growth there.
Our leverage as a market to that kind of quantitative easing has weakened in the eyes of investors and that is because of the impact crude prices have on our external account. This is because of whatever happened in the month of March in terms of the election results and Budget. So if there is quantitative easing going forward we definitely expect India not to participate as wholeheartedly as we would have expected pre-March.
That is what is reflected in the slight profit taking or in the outflows from the FII front. This is what I see across the investor base in terms of how they are looking at India and how they think India may not benefit as much from quantitative easing as some of the other emerging market, which probably could be more commodity heavy.
Q: You have tracked oil and gas for a long time. How do you approach some of these gas based stories, something like GAIL was down 8% last week, how did you read the note that came in from PNGRB and the fear there is right now of such great regulatory interference?
A: Without getting into specific stocks, it is a bit of a setback for the entire sector in terms of the return outlook. But, we have to clearly segregate companies which are not in the retail marketing front and which are not going to be under the purview of PNGRB.
Something like a Petronet LNG stands out. We know there have been excessive fears, but, we also like Gujarat State Petronet. I think the stock is factoring in all the negatives of new pipelines as well as regulatory risks. It is at a point where it is a good value pick, especially if you believe in the long-term outlook for the improving gas supplies, either through LNG or through recovery in Reliance's gas production. These are the two stocks which we like among the gas utilities.
Q: In the banking space so far we have seen good performances come in from some of the private banks like Axis Bank, ICICI Bank etc but within this space, which banks, if at all, would give you more comfort from an investment opportunity perspective from hereon?
A: Our top picks are ICICI Bank, Yes Bank, Bank of Baroda. From a result point of view, State Bank of India (SBI) could also surprise on their gross slippages number in terms of it being lower.
We could get a short-term upside in SBI from a results point of view but the asset cycle or the bad asset cycle is more of a journey than a cycle. Hence, we would keep getting over the next four-five quarters negatively surprised on the asset cycle, at least that is what our call is.
We would stick with private sector banks like ICICI Bank and Yes Bank in terms of a slightly long-term horizon, if you didn’t want to take a 12 months view on the sector.
Q: What about HUL? What are your thoughts on that because that stock has pretty much defied all valuation hurdle theories, it comes out with its numbers tomorrow, what are the trends that you are expecting from that one?
A: We are expecting a strong set of numbers for HUL. In fact that is one of the companies where we are expecting the numbers to surprise, if not surprise at least meet expectations and it will be a pleasant set of numbers.
We remain positive on HUL. The company is right now in the midst of a strong structural uptrading phenomenon which is there in the consumer sector. I think there is still appetite for stocks like those in India.
People want to buy India for growth, not for value and HUL is in a sweet spot both in terms of fundamentals and in terms of the investor appetite. As I said, the investible universe is coming down in India every passing day with fundamentals not keeping pace but, in case of HUL, we don’t see any such hurdles in the near-term or even in the next 12-15 months. We think the stock would outperform the market.
Q: What is the official call on Reliance now and do you expect there to be any cushion on the downside because of that buyback announcement?
A: More than buyback, I think the stock is right now stuck in the middle of very weak near-term fundamentals or lackluster near-term fundamentals. When I say near-term, it is two years before we see an uplift. But if you look longer ahead and look at FY15-FY16, there are three projects which are going to be commissioning, there is a likelihood of E&P production itself reviving.
I think the stock is in a no-man’s land or the stock is pretty much balancing these two factors of long-term growth, coming back say FY15-FY16 onwards. But, near-term fundamentals are not looking great and that is where buyback comes and support this stock.
I would say the stock continues to be rangebound between Rs 700 and Rs 800. Below Rs 700 is when the investor should be looking at it from a value perspective and for longer-term. But, if people don’t have that kind of investment horizon, it will remain a trading stock between Rs 700 and Rs 800.