Don't see significant earnings downgrades post Q1: UBS Sec

He says there was hope build around the government doing something, which as everyday goes by, looks difficult. Also, the poor monsoon has put more pressure on the fiscal, which will curtail the Reserve Bank of India's ability to loosen monetary policy.

"We continue to think that data points may not show a big reversal whether it is GDP data, earnings data etc. Although earnings have been actually quite okay, but my sense is that the data points may not show a lot of positive momentum," he told CNBC-TV18 in an interview.

Mahadevan does not see significant earnings downgrades post Q1 results. The valuations are reasonable, but the market is lacking triggers currently, he felt.

Below is the edited transcript of Mahadevan's interview on CNBC-TV18.

Q: How you guys are feeling about the market, you have been quite cautious. Have any of the domestic triggers improved since we last spoke?

A: Unfortunately, we continue to stay defensive on the market primarily because there has been some hope build around the government doing something, which as everyday goes by looks difficult. Secondly, with the way monsoon is panning out it puts more pressure on the fiscal which will curtail Reserve Bank of India's ability to loosen monetary policy.

Thirdly, we continue to think that data points may not show a big reversal whether it is GDP data, earnings data etc. Earnings have been actually quite okay. But my sense is that the data points may not show a lot of positive momentum. So, the combination of these three makes us very defensively positioned on the market.

Q: There are some who believe that in the December quarter earnings actually troughed out, given that you are expecting more GDP pain in the coming quarters and the weak monsoon, do you think that is true that we will get away with meddling earnings and we may have put the trough behind us?

A: For earnings I don't think there is lot of downgrades that are left to come because if you see consensus, we are at 13-14% earnings growth. Maybe that 13-14% becomes 10 or 12%, but beyond that I don't see much cuts because earnings have been coming down significantly for the last 15 months or so.

My sense is that maybe there is a good chance that earnings are fine here, but what I am worried about is what is the trigger for the market to re-rate. Given this year after the rally we have seen in the last two months, there are fair amount of negatives from government, monsoon and the political situations doesn't look promising even beyond May 14.

So, the combination of these things makes us quite cautious but if the government were to take some difficult decisions maybe we will revisit our thesis because India is not expensive at all. We are at 12.5-13 times one year forward, which is quite cheap compared to 5 or 10 year averages. It is not like we want to be negative but we don't see a trigger at this point.

Q: Any expectations from this parliament session which kicks off on Wednesday?

A: There is some level of hope. I would think the government would do something at least token, but my sense is India might need some of the difficult reforms probably. I am not sure if they will come through during this session because of the political compulsions.

We continue to watch the government closely because they have a very limited window before the next elections to do something. I hope there are some sensible people in the government; they hopefully should realize this use the slow GDP as an excuse to push through some reforms. Given the track record during the past eight years of UPA, I am not very positive. I am at the moment a bit skeptical on their ability to do things.

Q: What did you make of that Rs 14,000 crore bill and how do you see telecom doing in the near term?

A: We are all swayed a lot by the regulatory noise in the sector. Some of the time investors and analysts are tend to forget that the substance in this sector is that three companies are doing a good job -  Bharti Airtel , Vodafone and Idea Cellular . They have continued to gain market share as a group. They now control 67% of the market in terms of revenues.

Secondly, the government swung from one extreme to the other in 2008 we granted a lot of free licenses almost and now we are saying we want USD 3 billion for 5 megahertz of 1,800 spectrum and two times that amount for 900 etc. They are making some statements which lack or defy any amount of economic logic.

My sense is that either you have certain operators who say let’s pay the fee and create a very high entry barrier. In that case prices go up quite a bit because prices are not regulated in India or you assume that the auctions will fail at the current point in time. You have an example of Telenor which got in, in 2008 and it has written off close to USD 3 billion. I do not see how Telenor shareholders are still going to support the company to bid for licenses at Rs 14,000 crore price tag.

My sense is either the auction will fail or if the operators take up this challenge and create an entry barrier then prices go up. There is also a third possibility that this sector is going to be marred by a lot of legal processes because the operators have every right to go to the courts at these unreasonable prices that are being thrown around. The substance in the sector is three companies will continue to make progress, so that is why we are very positive on Idea and Bharti, in that order.