Chances of Nifty testing 4800 not ruled out: Religare Cap

Manoj Singla of Religare Capital Markets expects markets to trade with a negative bias for a few months. The BSE Sensex fell 100 points in early trade on Friday as the European Central Bank, after inaction from the Federal Reserve, disappointed markets looking for an imminent move to deal with the euro zone debt crisis, spurring risk aversion

"The chance of a test of 4800 on the Nifty is not ruled out," Singla said. The Reserve Bank of India (RBI) in its first quarter policy meet on Tuesday kept its key policy rates unchanged, but slashed the statutory reserve ratio (SLR) by 100 bps to 23%. Analysts are of the view that with 'non-event' from India's central bank, next trigger could come from policy reforms from the UPA government. However, Singla is not expecting any "significant" reforms from the government. In this backdrop, he feels, market can easily decline 10% if liquidity support is withdrawn. "We could see a PE de-rating if policymaking doesn't pick up," he warns. Below is an edited transcript of Singla's interview on CNBC-TV18. Q: You track Mahindra Satyam quite closely. What did you make of the numbers and how the stock should react? A: Numbers are obviously quite decent. Given what the other players in the sector are doing, they did towards the top end of what the other sector players did. Even on the margin front while a part of it was driven by currency, I still think they surprised positively in terms of operating efficiencies we got. So, all in all numbers are ahead of estimates. I do expect the stock to give you a good bounce from today. This is one stock that we have been positive on from sometime. Q: What’s the call on the market? Most of the triggers have played out now. Where does it leave stock prices from hereon? A: One has to say that it is the time to be defensive on the market. Given that a lot of the triggers have played out and we haven’t got much either from the ECB or from the Fed I think the market will probably trade with a negative bias at least for the next few months. On the economic forefront in India itself, we obviously have had now an official confirmation that the monsoon is bad. Therefore, I think inflation would remain high. So, we do not expect any big rate cuts from RBI anytime soon. So, Indian domestic problems will continue. Economic growth continues to remain weak. We do not see any kind of reform coming from the government anytime soon. So, one has to be defensive in this market. The classic defensives like consumers and pharma are the ones to trade into. Q: Do you think liquidity can still keep it afloat? Many of the fundamental factors as you outlined are pointing on the opposite direction, but the market seems to be still quite resilient. Do you think benign liquidity can keep it afloat despite poor fundamentals in the near-term? A: Yes, it could happen. That’s what’s been happening. If you see numbers for the month of July we have seen a lot of money coming in. There is a lot of debate as to whether this money is ETF money or people actually buying into India. But I think even if you get liquidity and people buy into the market, lot of the money is still going to go to the larger defensive names. So, people are still going to like the consumer names, the pharma names and maybe even some of the tech names. If rupee remains weak then tech could probably be more defensive sector in this environment. The way to trade is you basically buy into all these defensives and sit there. The market could hold out the sugar of liquidity coming in, but still I think the cyclicals will underperform. Q: Do you see major downside possibilities if we do get very ugly macro numbers over the next couple of months? GDP slips even lower and we don’t get any kind of sucker from either central banks here or central banks overseas. Is there a possibility of significant downside? By significant I mean 10% plus? A: We have already tested 4800 earlier in the year. If you look at fundamentals now compared to where we were six or nine months back, we had in fact worse off. So, the market could easily go down to 4800 or even lower than that if things continue to remain bad. So, as you said earlier the reason this market has been holding on is liquidity. If you do not get liquidity this market could easily go down another 10% in the next three-six months. _PAGEBREAK_ Q: What did you takeaway from the earning season? Were there any major surprises? Did it move the needle too significantly for the market? A: Earnings, if you look at on an overall basis compared to expectations are not bad. Expectations were already mellowed down getting into the earnings season. In fact if you look at across the board, while some companies disappointed, a large section of companies either met or beat expectations, especially in terms of profitability and margins. Earning season would not lead to any further big downgrade in terms of consensus EPS. But the fact remains that people are not too bullish on the market anyway. Most people are already calling for 8-10% kind of earnings growth in India. While that may remain intact after these earnings, the fact is that the market could get de-rated on a PE basis. While we always compare Indian valuations to history and say India is still trading at the lower end of trading range, the fact is on the global basis India is still one of the more expensive markets whether we look within emerging markets or even outside that. So, India could see a PE de-rating if things continue to remain bad both on a domestic and global basis. Q: How much would you re-rate Mahindra Satyam? Do you think it deserves to bridge the gap between that and HCL Tech kind of valuations? A: The point on Mahindra Satyam is one has to basically look at it on a consolidated basis along with Tech Mahindra. Tech Mahindra is going to report numbers next week. As everybody knows, while Mahindra Satyam is the faster growing entity or the better part of that merger, Tech Mahindra is where the whole problem lies both in terms of growth, margins and even in terms of business profile with British Telecom not doing very well. So, one needs to look at the Tech Mahindra numbers. My view is one basically needs to look at how the consol entity growing. If it was for Satyam alone I think the stock could trade up to 11-12 times earnings. But I think we have to look at Tech Mahindra numbers next week. We have to see what is the margins for the consol entity and how the consol entity is doing before taking a call on the stock. So, while we obviously get a gap up today and probably the stock will remain firm for a couple of days, I think a firm call can be taken only after we look at Tech Mahindra numbers. Q: What is your take on Wipro? Are valuations attractive or is it still prudent to stay away from it? A: On Wipro - valuations have obviously gone into the attractive zone. If you look at the PE of the stock it will be closer to 13-14 times earnings on FY13 basis. Given the kind of market that we are in, cheap valuations themselves cannot be a reason for buying the stock. Most analysts like us have gone wrong on Infosys just by saying that the stock is cheap and the company keeps on coming and disappointing and valuations keep on getting cheaper. So, unless Wipro comes and says that growth has stabilized or they are going to grow in line with the industry, it would be difficult to see the stock finding meaningful upsides. In my view what will happen is that companies that are delivering strong numbers, the likes of TCS or HCL Tech at least in the short-term will continue to outperform the likes on Infosys and Wipro. Q: How do you price in the monsoon now? Market doesn’t seem too worried about what it will do to the FMCG companies. Would be cautious on autos like M&M, two wheelers? A: With monsoon being bad, it will definitely hurt rural incomes. There will be an impact on a lot of sectors. As you said even on autos side - M&M will probably get hit harder compared to the Hero MotoCorp and Bajaj Auto. Bajaj, a lot of the story incrementally is on the export side. So, if they can get the export part right, Bajaj might hold up. With the new launches I think Bajaj might be able to do slightly better. But one would be cautious on names like Mahindra and Mahindra and even on some of the second tier FMCG names. Among the large players like Hindustan Unilever, given the breadth of their portfolio and the fact that the company is having lot of tailwind - they might do little bit better. But I would be cautious let’s say on second tier consumer names and the likes of Mahindra and Mahindra. _PAGEBREAK_ Q: Do you have any calls on aviation? SpiceJet surprised this quarter and today Jet Airways is out with numbers. Is it time to buy any of them? A: We don’t officially track the sector. Our only view on aviation is I think there is too much volatility in that sector. While obviously with Kingfisher Airlines not being in the picture I think Jet Airways and SpiceJet might gain market share and you might see good numbers from Jet today as well. The stock might give you a small trading up move. But I think structurally as a sector there are still lots of problems to be sorted out. So, fundamentally I would not advise getting into this sector at this point in time till we get clarity on lot of other issues. Q: What’s your stand on PSU banks? SBI has been coming up with numbers in a few days. Do you spot opportunity or again a stay away space? A: As a top down view, one should stay away from the PSU bank space. More so, considering what we are seeing on the monsoon side. A lot of the incremental NPLs that we are seeing in this sector are basically coming more from priority sector. If monsoon does not recover we might see NPLs coming especially on the PSU bank side. As a space we do not like the PSU banks. On a relative basis we obviously like SBI as compared to some of the other banks. So, SBI is one stock that has already taken lot of write offs. Much more than compared to what the peer group had taken. So, on a relative basis SBI might stand out. But as a sector or a top down view we do not like PSU banks. Q: Do you see the second half of the year also continuing with this intense polarization in stock performance where pharma, FMCG, more recently private sector banks - those being the clusters which continue to deliver returns as opposed to the rest of the sector? A: Incrementally that looks more and more likely. It can only be changed if we get some resolution on the global side. Basically we get some resolution to the euro issue, we get some kind of QE3 either from the Fed or we get some kind of liquidity injection from the ECB. If something of that sort happens in the second half of the year, we will see a lot of rally in the global cyclicals like metals. So, that is one thing that could change the picture. From an Indian perspective, the only thing that could change the picture is if we start actually getting some reform from the government. The possibility of that is becoming lower as we get closer to 2014 Lok Sabha Elections. I am already hearing that people are talking of farm loan waivers which could come in as early as by December of this year. So, from a domestic side one has to be pessimistic at this point in time. The only thing that could probably change the view if we actually get a QE3 or something from the ECB which could basically cause again a risk-on trade and markets to rally. But I just think that given the setup as it’s now at least for the near-term one has to stick to high quality defensives. Q12: Have you given up on that diesel price hike? A: Yes, I think you probably might get 50 paise here or there. But it’s very difficult to see a diesel price hike given that even relatively simpler reforms have been difficult to push through. So, a diesel price hike today looks like a remote possibility. Q13: When do things start turning around? When will the macro weakness, earnings weakness and the debt investment cycles begin to turn around? With some conviction can you predict that it will happen three months, four months, six months or is it still in the realm of hope? A: I was more bullish on markets than a lot of participants last year. I did hope that something will happen in December 2011 or at least after the UP elections. I have been consistently disappointed with how things have played out. As we stand now and as I said as we get given the bad monsoon as we get closer to 2014 Lok Sabha elections - possibility of getting that kind of reform process is basically died down. The only realistic chance of getting something is around 2014 Lok Sabha elections. If one was to look at realistic possibility. Obviously things could happen. We could suddenly get something out of the government in three months. We have a new finance minister and there is a lot of hope that he could come and do something. So, hope is always there. But on a realistic basis I don’t think we can expect anything over the next six to nine months.