Nifty may slip to 4500-4800, bearish on RIL: RBS

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Nifty may slip to 4500-4800, bearish on RIL: RBS

Markets are nervous as the street is unable to find any direction to move upwards. The jittery and nervousness may lead to further sharp downfall, say experts.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS RIL, Asian woes drag Nifty below 5400 FIIs inflow may slowdown: Vibhav Kapoor Sensex slips below 18000 on global cues; TCS, RIL dip Nifty may get knocked below 5400 on negative global cues US mkts end 1.5% lower, await FOMC minutes ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Unable to find any direction markets look nervous. The jittery and nervousness may lead to a further sharp downfall, say experts.

In an interview to CNBC-TV18, Parul Saini of RBS said that India's valuation is at 40% premium and the Nifty may slip to 4,500-4,800. According to him, India is reliant on volatile foreign institutional investors (FIIs) flows which is very volatile at present.

He explained, "FIIs flow of USD 12.7 billion have not moved the markets much. However the outflows could significantly dent markets."

Saini is bearish on Reliance Industries and oil marketing companies (OMCs).

Commenting that banks need to hike deposit rates, Saini said that large cap private banks are trading at rich valuations. However he is bullish on State Bank of India (SBI) and Bharti Airtel .

Here is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying video.

Q: The market has looked a bit shaky for the last few days. Are you expecting a deeper cut in India?

A: Yes, we are. We actually have a target of around 4,500 to 4,800 for the Nifty, which should be roughly 11% to 17% downside from current levels. We are expecting a steeper correction than some of the other market participants.

Q: In that sense, India which has been a relative outperformer compared to global markets, do you see in this stretch, India actually losing its outperformance?

A: Relative to Asia ex-Japan we could underperform a bit. The reason for this near term bearish view is a couple of reasons. One, valuations especially with respect to Asia ex-Japan is quite elevated, roughly at a 40% premium to the region versus historical average of around 17%. This premium is all the more surprisingly as the return on equity gap that India has usually commanded versus the region has actually shrunk quite a bit.

It is now only around 4% points versus the gap of around 10% points. We also see some downside risk to earnings estimates, roughly 3 to 6%. In addition, monetary policy as the Reserve Bank of India (RBI) has been transmitting, has been less growth friendly. Also because of the strong domestic demand, you have a widening trade deficit which is increasing the nation's reliance on volatile foreign portfolio flows.

We also see some lack of sector leadership so to speak. If you look at the last bull run from May 2003 to the end of 2007, it was actually driven by three key sectors which is financials, industrials and energy. Going forward, we are not expecting much from these sectors. These are the reasons why we are bearish near term.

Q: Speaking of portfolio flows, what is your sense? The next couple of months, do you see a wave of risk aversion given the poor macro data which is coming from the west because we have been fed on a diet of significant inflows over the last two months?

A: Year to date we have had roughly USD 12.7 billion of inflows and the market has not done much. If you have some risk aversion globally, this could catalyze the downside risk we are expecting. I do not have any strong views on where flows are going from these levels. Given that, you have USD 12 billion of inflows the market has not moved much. If we have some subtraction, I think that could help the bearish case in the near term.

Q: Do you see this downside target that you have on the Nifty, being triggered off by some big global events or even if the Dow were not to fall precipitously from here, in itself, because of valuations and reasons you mentioned. India could correct somewhat?

A: I think so. Even if you do not have a significant global correction, you could get the downside that I am expecting on the Nifty. Valuations are rich. Earnings estimates in the first quarter, the numbers were not that great. We some downside there and monetary policy on the margin is turning less growth friendly. Our sense is that core inflation although headline inflation, will come down because of low food prices. Core inflation is going to still stay pretty elevated.

If you look at the July number, you still saw acceleration in core inflation versus June. That will limit RBI's flexibility a bit. Our economists are expecting roughly 75 basis points (bps) of rate hikes through March 2011 and another 50 bps through December 2011, which is a bit more than what the forwards curves are pricing in which is roughly 90 bps over the next 12 months or so.

Q: What is that target predicated on? Have you used some valuation metrics to arrive at that base number that you are looking at?

A: The lower end of the price target is based on the valuation premium versus Asia specific ex-Japan, reverting to the historic average of 17% versus the 43% level currently.

If you look at 10 year average of India's forward price to earnings (PE) it has been roughly been around 14-14.5 times and getting to that 17% valuation premium versus the region would also roughly put you at 14-14.5 times.

Q: You do not see the possibility of a catastrophic sell-off in the next two-three months globally do you? Levels of 4,500-4,800 are still acceptable. It is a reasonable correction and might get a lot of the cash on the sidelines and an opportunity to enter as well. Any more and panic would set in. People have memories of 2008. Do you think it will be arrested to that and no more?

A: Given what we are seeing in the global cues right now, if there is further weakness on the global side, it will catalyze the Nifty getting to these levels. I am confident of making a prediction, that you will see much more downside versus these levels given what we know currently.