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Aug 10, 2012, 03.20 PM IST
Jyotivardhan Jaipuria of BofA Merrill Lynch expects the market to remain rangebound, but adds that the downsides are fully protected due to ample liquidity and a lot of hope that the government will finally muster the strength to take up on some much-needed reforms.
The market has moved closer to the topend of the range.
Head of Research
Bank of America Merrill Lynch
Q: What have you made of this telecom bust up over the last couple of days? What are your clients telling you about that big disappointment?
A: To some extent, this is in line with our views because we were one of the few brokerage houses that were negative on telecom over the last one year. Our view was that the regulatory pressure is too much and at some point these stocks would disappoint. So, to that extent, it is justified what we have been saying over the last one year.
For people, who are bullish on it, it has come as a bit of a surprise. So, to that extent, we have seen a sell-off in the stock. I think it is not just telecom, wherever the results have disappointed sharply, we have seen stocks correcting down quite a bit.
Q: Do you think the weak gross domestic product (GDP) trends and manufacturing trends, which we are seeing at the macro level, will translate to more earnings disappointments or drag downs as the year passes or will earnings be far more resilient than the breakdown in the macro numbers?
A: Earnings, to some extent, may be resilient. We have seen earnings getting downgraded quite a bit. So, now analysts’ numbers are not that optimistic. But for the last eighteen months I have been in the camp that will still keep seeing earnings downgrades, earnings are going to be very slow.
I still believe there will be downgrades in earnings going forward, though the magnitude may not be what we have seen over the last eighteen months. I think we will end the year with a single digit earnings growth.
Q: How much longer will the macro turf make this market grind in a range? Earlier, the hope was that by the second half of this year, some improvement will happen. Do you think it is looking like a longer haul now?
A: My view has been that we had a major investment cycle, 2003 to 2008. That was like in some sense unprecedented in India because we have never seen investment demand grow at over 15% in real terms, year-after-year for the period of five-six years. So, I think till we get that moving back, market is going to grind in a range because we will have slow GDP, earnings growth. That always makes it very difficult for the market to have a sustainable rally up.
I think we are in for a long grind in some sense. If we can get a few reforms in place then the grind would be higher rather than in a range which we have had over the last few years.
Q: How are you approaching infrastructure stocks like GMR ? They remain stressed in terms of their balance sheets, interest costs are 20-25% of sales. Do you see this kind of trend changing anytime soon?
A: We are generally being negative on these names because we are still very cautious no the whole investment cycle. Till that starts picking up, some of these names will continue to be underperformers in the market. So, overall, our stance has been underweight. There are ofcourse some stocks we play on and off, when valuations start to get cheap. But otherwise on the whole we have been underweight the sector.
Q: What are your expectations from public sector banks? Today, SBI announces numbers and we have not seen a great set of earnings and these stocks have corrected quite significantly.
A: The public sector banks are under pressure because their lending is to a vast range of the economy, unlike the private sector banks that are much more selective. So, to that extent, we were expecting NPLs to be high in lot of these public sector banks. I think the results have justified that.
In some sense, it has been very consensus because I would say most people in the market have not been very excited about the public sector banks. Only thing, which stands out for them, is lot of them on valuations look cheap. So, if we get a turn in the economy, if things stabilise then maybe we get little more optimism on the future growth outlook. Some of these could turnout to be good value buys. But otherwise generally we have been cautious on the public sector banks.
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