Don't see Nifty going above 5700 this year: Emkay Global

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Sandeep Singhal of Emkay Global Financial Services in an interview with CNBC-TV18 said that market is facing risks and macro headwinds in terms of governance deficit, lack of reforms, inflation, interest rate, QE3, etc.

"We don't see market doing any PE rerating. But, there would be either a range bound or drifting down market, I will not be surprised if this market goes to about 5,000 kind of levels," he added.

However, he believes that on a 12 month horizon market may touch a high of around 5,600-5,700 but, not beyond that.

Below is the verbatim transcript of Singhal's interview with Latha Venkatesh and Sonia Shenoy of CNBC-TV18. Also watch the accompanying video.

Q: What is the sense you are getting? Do you think the markets are now showing resilience? What have you made of the events of the previous contract closing and the ability of the market to withstand the 5,300 base? Are you getting a sense that the base is very firm now?

A: Not really, we have come out with a strategy report and have titled it earnings at risk. The theme is that from 2009-10 the rally was on the back of continuous upgrade in earnings and the same thing which was a cause for the rally, would be for a fall also in the market, because earnings would not go up.

What we are saying that in automobile and banking and financial space there were lot of upgrades. They compensated it for downgrades in real-estate, power, infra, pharma, and oil and gas etc. That is why FY12 consensus earnings could remain or could not fall more than 1-1.5%.

That is why we survived the rally and could not fall big. But now onwards, we don't see any upgrades in these two sectors and that is why there is a risk to whatever consensus earnings of about 1,220-1,230 we have on FY12.

When we have that risk and there are macro headwinds in terms of governance deficit, lack of reforms, inflation, interest rate, QE3 not coming or coming. On the backdrop of all these negative headline risks we don't see market would do any PE rerating. But, there would be either a range bound or drifting down market, I will not be surprised if this market goes to about 5,000 kind of levels.

Q: What exactly is the Sensex Earnings Per Share (EPS) you are working with for FY12 and what was it? How much was the downgrade?

A: Six quarters ago it was a Rs 1,277 exactly, about 15 days ago just before culmination of Q4 results it was Rs 1,255. So just a loss of about Rs 20. When I am speaking to you as of yesterday the it is at about Rs 1,220. Now onwards, we have seen lot of downgrades in earnings post Q4 results and it might settle about 5-7% lower from here in our view. That is where the problem is.

So, on the current consensus, EPS might look reasonably or fairly valued. But, if you say that okay, earnings would be 5% less, then you would find okay, it is expensive. This is because in a country where your bonds are giving about 8.3% yield, your earnings yield is 6.5%. So, these really need to match before we say the bottom has hit.

Q: I am interested to know more about banking correction that you are expecting, because even in expert earlier on in the day indicated that credit growth will be very slow and the concern will be more about the Net Interest Margins (NIMs) and how that will pan out for banks. From these levels, after the correction that you have seen in the month of May for many of the heavy weights in the banking space, how much more do you think banks could correct, the likes of SBI, Axis private and PSU both?

A: Banking has been a sunrise sector that led entire rally not only in 2003 which started with banking, but also in 2007 and thereafter in 2010. So, banking was a sector that was leading. Rightly, so because when we had strong IIP numbers, GDP numbers etc, banking is one sector one can look at.

What really happened in my view is because of this strong rally, lot of funds in onshore offshore entities went overweight banking. Somewhere in the last three- six months, we saw that the growth is coming to the expected rate.

RBI continuously increased repo, reverse repo rates. We are now almost at the peak of repo rate we are at may be 8.25% and peak is about 50 basis points (bps) away. So given the inflation and the consistent rise in interest rates it looks like there would be degeneration of demand. A lot of industries are not really putting new capacities and that is why capital good stocks are languishing.

So, in this kind of environment where government is not spending and private capital consumption is not really coming on the way, there is always risk to credit growth. That is what banking stocks are discounting.

And one is not willing to give very high book value multiples, but they used to give it earlier days, that is one reason. Secondly, funds were overweight and they are now going to equal weight kind of a thing. So, that selling flow is coming and that is why we saw price cuts in banking stocks.

Also Read: Motilal Oswal Sec revises FY12 EPS estimates to Rs 1200

Q: That is about the correction that we are seeing in the banking space and in the market, but there is some amount of bargain hunting that we are seeing in individual stocks in the midcap space as well. Anything particular that you are finding attractive at these levels in terms of specific stocks now?

A: Yes, definitely we are preferring midcap PSU banks like United Bank of India , South Indian Bank , Allahabad Bank kind of stocks which are almost at their book value or sub book value of multiples.

So we are saying that as compared to larger PSU banks, the smaller cap PSU banks could be better placed. This is because their ROEs are comparable. They are also encashing on technology and are reaching out to pan India customers. So, that is our theme and these stocks I mentioned one could look at from an investment perspective.

Q: What have you made of the markets itself? How much of a downside, since you are saying that there could be further earnings downgrade. What kind of Nifty level do you think the Nifty can plunge to and on a 12 month horizon what could be the highs?

A: On a 12 month horizon high may be around 5,600-5,700, not beyond that. But, interesting issue is, that post Q4 earnings there were lot of earning downgrades but not recommendation downgrades. Why this could happen was because in various stocks and sectors, analysts rolled over that multiples to FY13.

So, my sense is market may go to 5,000 is the floor I would say in that kind of a level, it will not fall into any panic that we saw 100-200 Nifty point cut in couple of days. Panic is not really expected. It would drift down at the max.

So, 5,700 is roof and 5,000 is the floor, but in the intermediate period, as we go for time correction and we approach September or December kind of a time period, the total multiple would roll to FY13 and market would start looking at cheaper kind of a thing.

So, the idea here is to look at value stocks and keep buying wherever one has visibility and wherever find a stock where earnings visibility exits. They are always better bet placed and  the theme is not going out of equity. Stay in equity, just move your weightages here and there, so that you can stay into the same full period and enjoy the growth when it comes after three, six or nine months anybody's guess.