IT giants TCS and Infosys both released their second quarter results last week and with context to the earnings results Infosys currently looks better than TCS as there is not much downside risk to it from here onwards, says Sanjay Dutt of Quantum Securities.
In an interview with CNBC-TV18, he said that there is a lot of earnings uncertainty in the market the technical structure of the market seems weak at present.
He said that the equities market could see much lows due to the recent sell-off trend in emerging markets and Nifty may see a 200-300 point fall.
Below is the verbatim transcript of Sanjay Dutt’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: The consensus seems to be an Infosys versus Tata Consultancy Services (TCS), Infosys preferred over TCS argument perhaps because the body language of the Infosys management was better and there seems to me more growth visibility coming in from Infosys management. What is your own call?
A: I can't say much about the body language but all I can say is that there are challenging times for this business. If you recollect last time we spoke and I was more optimistic on Infosys. They have guided down to the absolute lower end of the range. There isn't too much of a downside risk as far as the stock is concerned and even in terms of fundamentals they are better positioned now because there has been a very good correction in the stock. So, the price value equation is now kind of falling in place according to me.
There is scepticism about it across the street about technology sector but of course the new reality we need to get down to is that we can't expect the growth rates what we have seen 5-10 years back from these companies. The whole sector is going through life cycle issue but to conclude between the two yes, I do agree with you that Infosys looks like a better bet right now but TCS has some more work to do on the downside.
Latha: What have you made of the markets itself? We have moved off a distance from 9,000. Is it only for the moment, will we come back to see 9,000 this year itself or sometime soon?
A: We will. The problem what we are facing right now is the earnings uncertainty. Markets had run ahead of what the earnings would be like or what they expect it to be in September. However, some sectors would perform much better this quarter, that is September quarter where the results were going to come in and once we see that happening and once we see earnings outlook from a lot of other sector where we have doubts kind of going away then towards the latter part of this month or middle of November we may see the markets once again making an attempt to the 9,000 level. Sector like steel, cement etc are going to give more upside surprises than what we all are expecting and similarly some select banks. The correction would be over in today, tomorrow or in the next few days.
So, on balance while the technical structure of the market does look weak right now. We may see a little more downside. But I don't think there is any need to worry because liquidity flows are there from within India as well as overseas and we now need the earnings to catch up because that is the question mark all of us are plagued with. That is why you are seeing this kind of listless trading and drift down where valuations are appearing stretched based on the fact that earnings may not be as good. So, the biggest question now is earnings, which I have probably used that word 12 times in the last one minute or so.
Sonia: Are you worried that there would be a drying up of liquidity, there could be perhaps a global risk aversion towards equities because in the last three days we have seen Foreign Institutional Investors (FIIs) pull out almost Rs 2,500 crore in the cash market from India itself?
A: If you look what we are seeing right now in India is part of the entire emerging markets (EMs) trade. If you look at Russia, other countries, the currencies as well as market, currencies have weakened a lot over the last few weeks and currencies normally is the best indicators of all other linkages in financial markets we look at.
So, the EM correction sell off has been happening for the last few weeks. India has been little less affected compared to other countries and vice versa we didn't go up that much also in the last few months. So, it is an EM kind of trade that is playing out right now and if that gets extended irrespective of fundamentals and earnings etc, we probably may see much lower levels.
So, what is to be watched right now is the EM trade as well as currency and currency has got a dual issue here. We have got our own problems to deal with localised problems with regards to redemption etc as well as the pressure that is coming in from overseas. So, combination of these two may have a knee-jerk reaction on equities and we may go down 200-300 point on the Nifty but if something like that doesn't play out as bad as what I am thinking it may play out then we will be on track if earnings are fine.
Latha: You had indicated your preference for public sector banks (PSB). Now are you more confident considering that probably some of the sticky assets are getting resolved?
A: Yes, more than that -- I am not privy to any information of what is there in public domain but what I understand right now is that the single most concern between Reserve Bank of India (RBI), finance ministry as well as the Prime Minister's Office (PMO) right now is how to aggressively sort out the non-performing asset (NPA) problem.
A lot was done during the previous governor and the new governor is starting off with that as the priority agenda. We have just read a few weeks back, I don't know how far the press reports are correct that government has clearly seriously got back 3-4 options back on the table. The stressed bank option, lot of other options are being considered because the entire clean up from asset reconstruction companies route is not happening because of shortage of funds etc. So, we will see some more vigour in that in the next 2-3 months to clean up.
We may also see some amount of borrowing the phrase that the RBI governor used and I picked up -- that is the only thing that I picked up in the short interaction was a more practical approach to resolving things. So, what I read that is a little more accommodative stance at trying to help out promoters, trying to help out industries in trouble. So, that be the case public sector undertaking (PSU) banks would once again be rerated on upside and particularly the ones who are straddled with a lot of problems but still have a good franchise and a reasonably good asset book.
Sonia: I wanted to ask your thoughts on the oil marketing companies (OMCs) because it seems to be a perfect cocktail for them. Indian prices are rising and global Brent prices are falling. So, is this a space that still offers a lot of value?
A: In the immediate future may not be but the path ahead looks pretty good for them. We need to kind of wear out some of the gains, we need to kind of go through a correction phase both price and time. Once that gets over towards the end of this quarter that is December quarter once again fresh buying will come in once we look at next year numbers. They do look like a good bet over the next 2-3 years but maybe the next month or two they may just be sideways or correct but they should be part of your portfolio whenever you see an aggressive correction because otherwise I don't like public sector undertaking (PSU) companies, I don't like these kind of companies where there is lot of government intervention but there is a play there, there is an investment play there for the next 2-3 years.
Latha: Anything else you would watch, auto, auto-ancillaries?
A: Yes, I have been kind of neutral on that from a very short-term perspective, positive from a longer-term perspective. But according to me both a trade as well as good investment thesis lies in metals and cement companies and of course, we mentioned oil companies towards the end of the quarter.
Latha: So, the commodity guys are still your favourite?
A: Yes, I think so because worldwide we are seeing all countries, everyone including China rising that they need to sort out the issues of dumping, capacities, restrictions, jobs internally. So, some stability would come into that space. It has already come quite a bit but some more will come into that space but we would see improvement in prices as well as off take in countries like India because we have got huge demand-supply issues here.
Sonia: Because ICICI Bank is the stock of the moment, it is up almost about 5 percent along with Axis Bank, so, I just wanted to bring your notice to that. The Rosneft deal is a big positive for these two banks, the lenders to the Essar Group. So, what is your analysis of this deal and how it could impact banks like these?
A: I will ask the question will these banks ultimately get the money because whatever I have read and everything is so sketchy right now it is not the largest foreign direct investment (FDI) in India.
Latha: For sure ICICI Bank and Axis Bank make the money because they have lent to the guy who owns Essar Oil, that is Essar Global. So, those two are getting. So, I don't know about promoters making money and then putting it.
A: Exactly, so, there going by the price it looks like they are going to get money. There aren't any official statements from anywhere. But otherwise to say the largest FDI in India etc, I still can't deal with that. But the important issue is what comes to the banks and how much of it gets sorted out. But everything honestly comes back to the banks to sort out which the intent is frankly then there is a good play there for these banks and even other banks who have got to get their money back. So, we need many more of these kind of deals with big corporates who are in trouble right now. If that starts happening there is a massive rerating of the entire banking sector will start happening if we have two-three deals like this going through.