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Feb 19, 2013, 02.56 PM IST
This time there would be pressure on the government to raise taxes, which will impact earnings and companies, Sandeep Bhatia, executive director and head of sales, Kotak Institutional Equities told CNBC-TV18.
Union Budget 2013 will be closely watched by the market as it would be the present UPA Government's last full Budget before general elections. This time there would be pressure on the government to raise taxes, which will impact earnings and companies, Sandeep Bhatia, executive director and head of sales, Kotak Institutional Equities says in an interview to CNBC-TV18.
At the same time, he adds that Budget alone cannot be a game changer for the market as global cues and liquidity inflows too will play key roles. According to Bhatia, market movement this year would be primarily driven by earnings. Companies delivering 15-20% earnings growth will outperform in 2013. Meanwhile, he sees the downside risk for the Indian market capped at around 7-8 percent from the current level.
Sector-wise, Bhatia is cautious on the infrastructure space. He thinks large infra companies will have to deleverage their balance sheets for a durable stock rally. "We need clear policy action. I don't see a huge rebound in this sector anytime soon," he elaborates.
Below is the edited transcript of Sandeep Bhatia's interview with CNBC-TV18
Q: How was day one of your conference? What kind of mood did you see from companies out there after what has been a fairly pedestrian earnings season?
A: The day one was huge success. We had fantastic speaker sessions. Across the board, the message coming through was that we have seen the worst parts of last year behind us and clearly now it is going to be driven primarily by earnings.
Message coming from the multiple company meetings that were going on in addition to the speaker sessions yesterday, today and day after is essentially one of a bit of a cautious optimism.
There are issues that economy faces on the macro front. Expectations from the Budget are that it will not be spend and forget kind of a Budget; it will be a reasonable and responsible Budget. To some extent therefore there would be pressure to raise taxes and that will impact earnings and companies.
Q: A lot of the focus in your conference will be about infrastructure, because this quarter’s numbers were quite poor from that sector. No great signs of the investment cycle picking up. Are your investors getting more cautious on that space or are they hopeful that things will start picking up?
A: As far as capex and infrastructure sectors are concerted, there is reason for continued caution there. I do not think balance sheet issues of the large corporates have been sorted out. Also policy action needs to be clearer. To that extent I do not think that sector is going to see a huge rebound anytime soon.
The best we can expect is maintaining the current low digit kind of earnings growth for the large well-capitalized companies and some kind of resolution for the companies which have balance sheet issues. I do not know whether we can expect the market to bail them out. Right now there is no appetite for these kinds of issuances.
Q: What do you make of the way the first couple of months have panned out? The expectation was that this calendar year would be very front-loaded in terms of returns for the market. That has not really gone through. How do you see things moving aside from this big Budget event that we are all talking about?
A: It was simplistic to assume just because September-October-November were good, similarly January-February will continue that kind of good run for the market. The market has wiped out its relative cheapness in the rally which happened in the last quarter of last year.
From hereon, it is going to be the hard slog of earnings growth and the hard slog of delivering cash flows to shareholders. That is definitely going to take much longer than a quick re-rating would take in the markets.
Let us wait and see how the Budget pans out. We also had lot of discussion about how things will be from hereon to the end of this government’s term and then thereafter what kind of coalition can come into power.
Although this is definitely going to weigh on investor’s mind, I think this year returns would primarily be driven by companies which continue to generate 15-20 percent plus earnings growth rather than being front-ended or back-ended.
Q: All those parameters on earnings or cash flow though have been pretty poor by the time we have wrapped up earnings season. What does this translate into in terms of downside risk for the market? Would you say it has grown deeper and how much lower could it be?
A: The downside risk is shallow as long as flows continue. We have seen issuances from the government and the response to that has been very good. Flows are coming into this market and downside is a function of whether we see flows coming off.
I do not see flows coming off right now, so the downside is limited. But the real issue is that the market has not been able to motor up and is now looking listless because we need much more than just re-rating to put it up to make it go forward. So, the downside at best is capped to around 7-8 percent for this market.
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