Profit from market in Feb, expect pain in March: Ambit Cap

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Profit from market in Feb, expect pain in March: Ambit Cap

Saurabh Mukherjea, head of equities at Ambit Capital spoke to CNBC-TV18 about how he read the market.

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Saurabh Mukherjea, head of equities at Ambit Capital spoke to CNBC-TV18 about how he reads the market. 

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: We have had a phenomenal start to the year which has brought us almost to 18,000. Would you take profits here and is your call for Rs 14,500 still intact for 2012?

A: On January 4, we made two calls 14,500 in Q1 and 18,000 over the course of the year. Clearly, the 18,000 call has worked out better than the 14,500 one. I think this month, we will continue seeing the market grind up.

The ECB announcement on Friday that there will be another bout of QE on February 29 will lend a lot of support, especially since the ECB said that the end of the month QE announcement will be similar in size to December 22 one. That sort of announcement will lend a lot of support to risk asset classes globally. So I think this month the market will continue grinding up.

The problems kick-in in March. Obviously, key set of political catalysts - RBI rate announcement and then obviously the budget. So March is going to be a far choppier.

This month I think the broad direction will continue running upwards. So if you are a speculator, if you have short-term profits in mind, I don't think you will have that many problems in February. March is your month of pain I think.

Q: So at this point, how low or limited is the downside risk do you think?

A: I think at this juncture, in all likelihood I think 18,000 is probably a heartbeat away for the market. If we do break on the downside, it's probably something like 17,000-16,500 will cap the downside, largely because of the sheer amount of QE happening. The Bank of England did around USD 100 billion last week and if the ECB repeats December 22, you are looking again at something like USD 700 billion. That's a lot of risk appetite which is being generated and I think that will lead to FII flows continuing.

Q: The last one week of earning season is not been very good despite talk earlier that this is been not such a bad earning season after all. What did you take away?

A: The earning season panned out as we expected it to be. We expected to see margin destruction and we saw that at the operating margin level. Sequentially, I recon operating margins is sequentially around Rs 150-200 basis point. I think topline growth will continue slowing down. Therein, like a fundamental point for investors to take heed of, the economy isn't going to improve for at least another two quarters, perhaps three quarters.

Sequentially, growth will trend down for at least two more quarters. Hence topline growth will continue slowing down and margins will continue to be under pressure.

Therefore, the only way to profit fundamentally from this turn in the market is to play high quality names, strong balance sheets. The names you rattled of about weak results last week are a case in point. These companies will continue posting weak results for at least couple of more quarters. Hence the imperative is that investor focus on the better names, the stronger balance sheets in the cyclical sectors, whether it will be power infra, financials; focus on the stronger names, better balance sheets and you will be able to ride the recovery in the cycle because you got two more quarters of economic pain, weaker margins and slowing topline growth yet ahead of us.

Q: The force that has fought all the skepticism is the way flows have moved through the early part of this year. So what are you guys picking up in terms of the flows parameter and whether or not there is more interest on the market post this 20-25% rally?

A: Therein lies the nerve of this rally; I haven't seen FII's this optimistic about India for the last couple of years. It's astonishing to see the degree of appetite around the world for Indian power, infrastructure, realty and financial names - the cyclical sector that is. But even within that constituency, the client base is trying to discern between the broken balance sheet names and the high quality names.

While the rally has so far favored the broken balance sheet names, the names that were really beaten down by 80-90% last year, my sense is gradually as realization dawns that the economy will stay weak for some time yet, I think the rally will gradually shift to the stronger names in the cyclical sector.

Flows continue to be very strong; for the first time in two years, I am seeing clients receiving in some cases half a billion dollars of flows, in some cases smaller sums of money. But all of that or some of that is making its way to our market and that's clearly helping Indian equities.

Q: What do you stay focused on right now because with so much money coming in and people seem to have taken their eye off the fundamentals. So right now do you just keep focused on the global liquidity aspect of it or do you start taking call that wherever money takes prices, you need to be focused on fundamentals and take a basic view?

A: I think you hit the central dilemma for people like me at the moment. We are having to contend with the weaker names arising purely on the back of speculative flows and against the fact that the fundamentals stay weak for these weaker names. The way we are advising clients is to say that if you are a large institutional investor, you need to focus on high quality names because while the QE tide is strong, the weaker names will rally.

Once the central banks take the throttle off QE; it's hard to know exactly when they will do that; in February, the central banks have the QE machine switched on full throttle, but say middle of the year, Q3 onwards, the Fed decides to take its throttle of QE and ECB decides to do the same, then if you have weak names in your portfolio, if you have broken balance sheets in your portfolio, you will be left very exposed.

So much better to play this recovery, play this swing in the economic cycle by focusing on the higher balance sheet names. That will mean you will sacrifice some upside in the near-term and if you buy something which has been beaten down 80%, then you will get bigger short-term relief on your portfolio. But if you want to genuinely profit from the Indian economy over a one year time cycle, you need to focus on the stronger balance sheets, on the higher quality names across all the cyclical sectors from banking through to real estate.

The good thing is there are such stocks available in our country and they are trading at sensible valuations. All we have to do is have the discipline to focus on them rather than the speculative bubbles that are forming in the weaker names.