Maintain year-end Sensex target of 19000: Ambit Capital

Government’s clarification on General Anti-Avoidance Rule (GAAR), oil prices and if there is quantitative easing (QE) by the European Central Bank (ECB) in next three-four months, he told CNBC-TV18.

"My sense is we will get these three factors and at least two will work out for India," he added. Mukherjea is relatively optimistic about Sensex 19,000 scenario between now and the year end.

Meanwhile, he expects the government to give clarification on GAAR in the next 7-10 days. "A positive clarification on GAAR could give the market easily a 4-5% fillip over the next week to ten days," he said.

Below is the edited transcript of Mukherjea’s interview with CNBC-TV18. Also watch the accompanying videos.

Q: We haven’t had a special series in the one gone by but global markets seem to be incredibly intact with their strength, how are you calling this month for India? Do you think it will be one where we see a return of flows courtesy the global mood?

A: The resilience of global markets has a lot to do with the fact that the US economic recovery, whilst it is stuttering does seem to have some legs in it. Secondly, on the ECB front, for all its evils, LTRO has put a backstop on the European situation. So, the confidence in the western world is at a different level to what it was six months ago.

Now going forward, our fate will be driven by three things, government’s clarification on General Anti-Avoidance Rule (GAAR), oil prices and whether ECB does another bout of QE in next three-four months. My sense is we will get these three factors and at least two will work out for India. I remain relatively optimistic about the Sensex 19,000 scenario between now and the year end.

Q: A 19,000 scenario is by the end of the year but if two out of three of those events play out in our favour, what kind of an immediate bump up do you think it could give to the markets?

A: The first major catalyst to focus on is clearly GAAR. Between now and May 10, I would expect the Finance Minister to take a position on this subject. I will be very surprised if we don’t get a positive clarification on GAAR. Given the state of our current account deficit, given how dependent the government bond market is on FIIs and given the need for foreign capital in the economy, I will be very surprised if the FM doesn’t take the relatively soft line on the tax registration certificate for Mauritius or short-term CGP.

If you look over the next 7-10 days, a positive clarification on GAAR could give the market easily a 4-5% fillip over the next week to ten days. That is the near-term, beyond that looking out further over next two-three months, oil will still remain an area of focus.

If Brent begins a move towards USD 100 per barrel from its current position of USD 120 per barrel that could add another 5-10% to the market. So, the journey from where we are at the moment on the Sensex to till roughly 19,000 could be driven almost entirely by a positive clarification on GAAR and oil tracking our way. Beyond that, we do go back into the domain of longer-term fundamentals and that is a much more complicated debate.

Q: How do you approach some of the defensive pockets now they have just been moving with increased strength and more premium valuations - for HUL for instances how do you approach that stock now?

A: The Indian consumer is still alive and kicking, it is one part of our economy, which continues to be healthy year after year. So investor interest is high in this space and the valuations reflect much of that. On a stock like HUL, stocks are outstanding. They have surprised us on the upside but at 30 times earnings, I believe it has got its numbers factored in by and large.

Our focus will be much more on finding B2C stories or light industrial stories which will continue to do well in the tough economic climate, but have valuations in the 15-16 time space. Some something like Cummins or Kirloskar Oil Engines in the light industrial space or Exide Industries in the car battery space. Those are sort of stories where we believe the consumer will continue delivering good numbers if valuations are reasonable that is where we would look to build interest rather than going after the front line FMCG stocks.

Q: How interested would you be in the midcap IT space because the results have been quite exceptional, we have seen KPIT Cummins today but even Hexaware reported a strong set of numbers, is this space that demands attention now?

A: The midcap IT space is quite heterogeneous space, all sorts of firms are there. If there is a broad trend to be deciphered there it is the US economy recovering, with the European situation broadly having bottomed out. The IT export story, the BPO, the out sourcing story will have some more momentum behind it in the coming quarters. To the extent, the smaller firms will benefit more in a better growth environment.

Even the midcap IT firms do become interesting; a stock like KPIT Cummins is around 11-12 times earnings. KPIT is very interesting in the current climate. More generally, even in names like HCL Tech, I would say is worth looking at closely given the recovery is underway particularly in the US.