Mkts driven by fund flows, not fundamentals: Kotak Inst Eq

Here is a verbatim transcript of the exclusive interview with Sanjeev Prasad on CNBC-TV18. Also watch the accompanying video.

Q: Since we last spoke and you were shaking your head at valuations, we have gone up a little bit more to more than 17,000, are you a bit baffled with how the market is moving?

A: This is all driven by liquidity. Valuations have lost meaning given the flow of money which is there. So market is already at more than 18 times on 2010 numbers. If we exclude the commodity sector then they are looking at a market which is over 20 times. Most of the sectors barring energy, cement and telecom are trading at anywhere from 19 times to 29 times March 2010 numbers and about 17 to 23 times March 2011 numbers.

So clearly valuations have gone up significantly. Now earnings have to get upgraded or otherwise I don't think this can sustain for very long. Money flow can keep the market beyond the fundamental value for some time but it cannot be there in perpetuity. So at some point of time earnings upgrades have to be pretty significant or this market is going to correct.

Q: Given that you have worked at the most bullish end of curve, how much would you give an earnings upgrade for this market?

A: We are already quite ahead of consensus. If you look at it on 2010 basis, we have an EPS for BSE 30 at about Rs 939 which is about 7% growth compared to 2009 and for March 2011, we have about Rs 1,130 which is about 20% growth. We are ahead of consensus by about 10% for both the years. The more I look at some of the sectors, the more I get worried that there is very little scope for earnings upgrades. In fact in some of the sectors, I think there is pretty large chance of earnings downgrades.

Let us start with the largest one which is energy which contributes about 30-31% of the BSE 30 index numbers and Reliance' numbers still struggle, I think consensus numbers are way too high. In fact we are the lowest on the street over here at Rs 104 EPS, but if current margins continue, chemical margins have corrected something like 20% over the last five weeks, refining margins are absolutely horrible, then there cannot be too much of a positive surprise from the gas side because we know exactly how much volumes they will do and what is the price over there. So if we put it altogether, even Rs 100 is going to be a big challenge for Reliance this year.

The next big one is ONGC which is about 17% of the BSE 30 earnings and our numbers are ahead of the street and there could be earnings risk because if crude prices continue to go up, the government maybe forced to put a large amount of subsidy on ONGC which would hurt the earning numbers of that company. So that is one sector I am a bit worried about now that 30% of the earnings.

Then you come to some of the larger sectors like technology sector, where again maybe volume numbers are a little bit surprising on the upside but given the way the rupee is appreciating, I don't think we could see a lot of earnings upgrades over there.

Infosys guiding to Rs 200 already guided at Rs 105 for March '10, so I am not too sure whether there is too much of earning surprise over there. That is about 10-11% of the BSE 30 earnings.

Then we have telecom-we know what is happening over there, if anything there is downside to earnings over there. That is another 7-8% of the BSE 30. So 50% of the earnings of the BSE 30-I am a little bit worried about now. So where is the scope for big earnings upgrades will be the smaller sectors which I don't think can shift the needle too much.

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