Mar 11, 2013, 01.32 PM IST | Source: CNBC-TV18

Market may not hold last week's gains: Religare's Patnaik

The market is unlikely to sustain last week’s gains, feels Tirthankar Patnaik, Director Institutional Research, Religare Capital Markets, as it is lacking in fundamental triggers.

The market is unlikely to sustain last week's gains, feels Tirthankar Patnaik, Director Institutional Research, Religare Capital Markets, as it is lacking in fundamental triggers. He sees the rupee as being a key sentiment trigger near term, given the huge current account deficit, and expects the market to consolidate in a narrow range till May.

Patnaik does not expect a strong recovery in corporate earnings anytime soon. According to Religare estimates, earnings per share growth rate for the current financial year is seen at 3 percent and that for next year is seen at 11-12 percent.

Also Read: Market may become 'untradable'; buy on deep dips: Sukhani

Patnaik is hopeful that the Reserve Bank of India will cut benchmark interest rate by 25 basis points at its review meeting next week. This should be beneficial for power finance companies like REC.

Still, a cut in interest rates may not be good enough to boost overall sentiment beyond a point, as the threat of a sovereign rating downgrade still looms. While fiscal deficit may not be a major issue now that the government is taking corrective steps, the market is worried about the current account deficit, which will not be so easy to bridge.

Patnaik is hopeful that the government will be able to raise Rs 40,000 crore through divestment in state-owned firms next fiscal.

Here is the edited transcript of his interview with CNBC-TV18

Q: Do you expect this pull back to continue, or do you see significantly higher levels in the near term?

A: Unfortunately, no. The macro situation remains quite cautious at this point. So, at 5700 levels, the market saw some expected pull back. Going forward, unless the macro situation really improves, we don’t see the market really sustaining these gains. To us, the big variable becomes the USD/INR at this point. So unless the rupee shows market improvement from current levels, which will in turn determine how capital flows come in, we don’t see the market really sustaining this sort of direction.

Q: What action do you think the Reserve Bank of India (RBI) will take in the policy on March 19?

A: I think it is pretty much a consensus that we will see a 25 basis point (bps) rate cut. A positive surprise would be a 50 basis point cut, although we think that is unlikely. They might also save the best for the annual policy around April. So at this point, we will expect the RBI to actually follow through with the CSO numbers, GDP numbers and frankly, the Budget arithmetic as well. So I will be disappointed if 25 bps does not come in the policy.

Q: What about earnings? In a few weeks we will start talking about April earnings season.  Has the market fully priced in a not special set of fourth quarter earnings, or could there be disappointments?

A: If one looks at the headroom for the fourth quarter, versus the overall number for FY13, I think you might still see some downgrades going forward. After the market’s upmove in the fourth quarter of calendar 2012, we have seen these moves actually outnumbering downgrades. But I think after the sobering third quarter results, we have seen numbers getting more in line.

So, our estimate is around about 3 percent growth for FY13 - that rises to around 11-12 percent for the consensus for FY14. We believe that number will be closer to around 10-11 percent. But if one looks at the headroom, possibly you might see downgrades as we go into the last week of March.

Since May, has been that there has been a secular upmove which we believe is coming from the government’s reform agenda. Secondly, the global backdrop has remained favourable. But in between, you have had markets dipping and then going up. I think the current dip and then the rise has been one of them. We believe overall, the market’s direction is on the way forward, broadly inline with how the macro recovers really.

The government’s numbers are between 6.1-6.7 percent for FY14. We believe those numbers are unlikely to be met. Our number is about 5.8 percent, with downside levels particularly if the government really sticks to its fiscal deficit numbers of 4.8 percent. In that case, we believe the number will be closer to 5.5 percent. For us, the markets will have a very marginal slope up in the next month and a half.

Q: What’s your prognosis for how the market may move over the next month and a half? We have sort of gone in a loop where the market lost a lot and then with short covering, recovered as well. How do you think things are going to be from here?

A: Since May, has been that there has been a secular upmove which we believe is coming from the government’s reform agenda. Secondly, the global backdrop has remained favourable. But in between, you have had markets dipping and then going up. I think the current dip and then the rise has been one of them. We believe overall, the market’s direction is on the way forward, broadly inline with how the macro recovers really.

The government’s numbers are between 6.1-6.7 percent for FY14. We believe those numbers are unlikely to be met. Our number is about 5.8 percent, with downside levels particularly if the government really sticks to its fiscal deficit numbers of 4.8 percent. In that case, we believe the number will be closer to 5.5 percent. For us, the markets will have a very marginal slope up in the next month and a half.

Q: On the point you were making about the IIP print and the kind of news flow there is, generally in terms of projects coming through for capital goods companies or infra companies. How much more pressure do you see for that sector and how many more quarters of it being an underperformer?

A: The sector has is likely to have bottomed out. We don’t see much downside, going forward. I guess the question here is - are we going to see a significantly quick recovery where defers the consensus. We don’t believe that recovery is likely to be soon. So, for the third quarter, the 4.5 percent number might see a marginal upmove in the fourth quarter at the GDP level to about 4.8 percent or so. But, this number is likely to remain around 5-5.1 percent for the first quarter in FY14. This just means that for the manufacturing, for the industrial space, the weakness is likely to continue for some time. We don’t see the IIP therefore moving up meaningfully at least over the next two quarters which would of course translate for the stocks.

Q: What do you expect the trajectory this year to be? If earnings and macro are not going to recover at a very rapid pace, do you think we are purely at the mercy of global liquidity? Do you think the market will be volatile in a middling kind of trading range?

A: What you say is right. In addition to that, we believe that the government’s reformist posture is likely to continue. We are not in the camp that believes that in a pre-election year, and the government might give into populism even towards the second half of the year. The threat of a downgrade hangs like the Sword of Damocles on Indian market.

Unless the government continues to do what they have been hinting at over the last six months, let’s not forget we still have a negative outlook on the market by major credit rating agencies.  Moody’s near-term view apart, we are still looking at a downgrade if the government does not meaningfully improve its current account and fiscal deficit position. On the current account, things are really bad. On the fisc, there has been a good show by the government thus far but this has to be maintained.

Therefore, to my mind, for the market, other than the favourable global backdrop, the reformist posture for the government is something that’s likely to be positive as well.
What’s the negative - how much of a macro recovery are we looking at? If the macros don’t improve, then as I just pointed out, you might see dips and moves up. The market might move in the range, with only the broad move upwards. So you might see a very marginal slope going up actually.

Q: What do you think the fiscal deficit picture will be by the end of this year? This year, the government will probably not have the luxury of scaling back on planned expenditure like it did last year, going into elections? Is there a fear that there could be some spillages going into the second half of the year which might put once again the whole rating question at risk?

A: They have arithmetically shown 5.24 percent in FY13. It is not impossible to show a 4.8 percent number for FY14 as well but where the government will not do fiscal profligacy is given the threat of a downgrade. I know what you are saying is that they can’t do a cut in planned expenditure as they did last year. But let’s bear in mind that they started with 20 percent for FY13, they ended up doing flat so that gives a decent amount of upside number, about 30 percent for planned expenditure for FY14. Even if they do a 20-25 percent number, it is still de-growth from where the budgeted numbers are.  So to my mind, there is room for some sort of rectitude even there. But what the government will not do in our minds is move from the fiscal prudence number that they have shown of 4.8 percent.

So at maximum, you might see a 5-5.1 percent number, not a big miss that we saw in FY12 or FY11 for that matter. So we don’t believe that fiscal deficit is likely to be a big concern going forward.  Let’s not forget that any kind of move up in auto fuel prices as it has been happening over the last two months or so, however long it continues, does contribute to a dip in the overall subsidy numbers. With global growth at around these levels, one does not expect crude to really spike up. So to my mind, fiscal deficit will not be an issue for FY14 frankly. The current account deficit issue remains, and that’s where India’s terms of trade are rapidly worsening. Not just over the last one or two years, we believe that they have been worsening for a longish time and that’s where the government will be worried.

Q: On policy itself, what do you think the Budget session will deliver? Whatever had to happen with oil has happened. Any other sectors or specific issues that you think might get attention and get clearance this session around?

A: From the winter session, there were a couple of bills that were not really done. Insurance is something that might just come in. So overall, I am not expecting too many fireworks in the Budget session although the fact that it might just continue towards the second week of May might just prolong things a bit. There was the concern on the double tax avoidance agreement - that’s where the finance ministry has come in, and hopefully assuaged feelings of investors. So, one would not expect too many negatives from the Budget session going forward.

Q: What kind of response do you think some of the government paper is going to get? RCF got done but Nalco and SAIL are slight more tricky ones.

A: Again it comes back to the point that the government has to maintain a positive feel-good factor if I may for the markets in the next quarter or so, at least or even two quarters to push out this paper. The supply of paper, we have a very decent target for FY14 of almost Rs 55,000 crore of which you can take out about Rs 14,000 crore of Specified Undertaking of the Unit Trust of India (SUUTI). But Rs 40,000 still remains a decent number. While there are lumpy parts here, you might see the government still pushing in a decent number of equity supplies.  So, I think supply will come in and the market will lap it up. The corollary for us is that given the DII is not really seeing equity inflows over the last couple of months, you might see some move away from midcaps, and from tier 2 stocks even now.

While DIIs have seen some respite in the kind of redemptions over the last couple of months that we have seen now, that sort of is factoring in, in terms of the sell off that domestic institutions have had over the first two months of the year. You might still see pressure. So that’s the corollary we take from government equity supply coming in.

Q: You have recently upgraded some of these NBFCs - PFC and REC to a buy. Can you take us through why you are bullish?

A: First part is the valuation call, negative news on the sector is largely factored in. The government has put in a plan of SEB restructuring. 50 percent of the losses will be taken up by the state government. So contrary to what’s happening in the larger macro, incremental negative news here is very low. We have had tariff hikes across major states over the last couple of months. What has happened also incrementally is that the spreads these companies enjoy have sort of increased given their mono line nature and given their banks have been fairly reluctant to lend to this sector over the last couple of months. Lastly, the lending in this sector has about fairly long reset periods - sometimes three years, sometimes five years.

So as interest rates come down which we believe would, the overall cost of funds in the economy comes down. These companies will have decent spread going forward. That spread will be maintained. So valuation along with spreads would be one reason why we are turning bullish. We had sta ted with the negative view on these mono line companies about a year-year and a half back - that call has bought down but we believe most of the negatives are in the price.




 

READ MORE ON  Sensex, Nifty, Tirthankar Patnaik

ADS BY GOOGLE

Buy & sell politicians on Power Play
- the political stock exchange

Price Update

Narendra Modi

88737.93 258.21 0.29%

852

Bought today

703

Sold today

0.46%

User holding

video of the day

Chandra says satisfied with TCS' FY14, FY15 to be better

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.