See further correction but no major monsoon impact: Kotak

Here is a verbatim transcript of R Venkat Subramanium's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: What's your sense, does the market need to adjust further downwards for this monsoon scare?

A: Even at the beginning of the month, the market did not account for a bad monsoon. Obviously, the monsoon picture has worsened in the last one week but it was always known that it won't be a great monsoon this year, in spite of which other factors kept the market going higher. So when the news becomes worse, the reaction has been stronger than what one would have expected particularly, in the auto segment. The the adjustment for this disappointment may go on for a while but I don't think there will be any serious impact on the market in the next one-two months. The government, which is in the process of building up the infrastructure and is keen to act proactively on any crisis situation, wouldn't let the farmers go into a distress situation because of one patchy or failed monsoon.

So, if at all a sector there's going to have a slightly lasting negative impact because of bad monsoon, it would be more on the banks particularly the public sector banks than fast moving consumer goods (FMCG) companies. I think the current reaction in the market is a little overdone on auto and FMCG and you may have to worry about the banking sector more than the auto and FMCG.

Q: Do you think the market or investors need to realign earnings expectations significantly because of the monsoon factor or do you think earnings will more or less be what people thought even before the monsoons scare came in?

A: There is going to be a little bit of revision down on the gross domestic product (GDP) estimates. So to some extent that may affect the earnings with a lag but by the time it spills over to FY11, we expect a reasonably genuine uptick in earnings - it may not be that severe because of the monsoon.

In the near-term, in the next one-two quarters; I don't think there will be any big earnings revision because of monsoon even otherwise the Q1 earnings were a genuine surprise on the upside though led by margin expansion more than by topline. The fact remains that we have had a decent earning season in the Q1 and I don't think this monsoon fear would affect the earnings estimates for the next one-two quarters.

For FY11, there are other things that go into the pot and hence it's difficult to estimate right now how much earnings would be affected by the ongoing monsoon fear. So it's a little early to actually pinpoint what extent of fall we can expect in earnings. There will be other factors, which will drive the market from here after week, over this one-two weeks of monsoon-related worries than monsoon itself. Global factors whether the risk cloud that the international investors are currently exhibiting will continue whether the impending or the much-expected dollar fall will be a smooth affair or will it actually create disruption in the currency market, which can spoil the sentiment for equities. Those are things that we will be perhaps worrying about in the next one-two months and not so much the monsoons.

Q: Would you be surprised by another 10% fall from the current levels?

A: It is possible. The market was pricing in a lot of positive expectations mostly driven by huge liquidity surge that we saw across the globe. So if there is a little bit of slowdown in that, it is quite possible that some of the early entrants in this market may feel like: we are making decent amount of money and I don't want to miss out this opportunity, so let me lock in. In some of these index stocks, the price is not supported by current valuations. You have to stretch yourself to 2011 optimistic estimates to be comfortable about holding these stocks. Many of them perhaps are not selling out right now because the momentum is supporting the market, so why get off the stock that is moving up.

But if you see some slowdown in the FII flow and if there is a little correction in the market, lots of people who are holding the index stock may come to sell and that can cause the market to fall.

Also the fact is that we are in an extremely volatile market, we haven't seen this kind of volatility anytime in the recent history, 45% volatility on the Nifty and you can see that when you watch the screen during the markets hours, it almost looks like those numbers don't matter; people have this index trading at 50-40 point kind of ticks.

It's an extremely volatile market and a 10% move may look large but when it is falling, it looks like it can go to any extent. So it's possible that we get a sharp pullback. Also, it is to a large extent dependent on how much more money there is waiting to come. Because in the last three months, if you are investing on the basis of PE or valuations you would have been led the wrong path. The right 'E' to my mind is QE (quantitative easing), if you are following liquidity, you are doing much better than following the valuations but if that is coming to an end for any reason, you will start worrying about PE and a fall of 10% is not unthinkable.