Ambit Cap keeps target of 18000-19000; sees no RBI rate cut

Global cues have started dwindling again, taking markets down as well. European markets gave up quite a bit of those gains they earned post the EU summit and the European Central Bank (ECB) and Bank of England (BoE) monetary policy meetings.

In an interview to CNBC-TV18, Saurabh Mukherjea, head of equities, Ambit Capital says that as we heard towards the Federal Open Market Committees (FOMC) August 1 announcement, investors may find some zest coming back into global markets. “There are widespread expectations of QE being pushed through at the August 1 FOMC announcement,” is his view.
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The money flows continue to remain strong as investors’ appetite for India keeps growing. He notes that amongst the large emerging markets India is really the only market to attract hot-flows pretty much consistently through this calendar year. He sees both long only and hedge fund inflows into India going ahead.
He remains positive that the Sensex will touch 18,000-19,000 by the end of this fiscal. “Whether we raise our 18,000-19,000 target for the Sensex does depend on this six week intense political activity,” says Mukherjea. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: We had a good rally a few days back after the Euro Summit, but that seems to have petered out a bit. Euro has gone back to 1.22. Do you think markets are feeling a bit disenchanted after the initial reaction?
A: I guess it’s a mixture of the weak American jobs data plus the somewhat perplexing statements from Mario Draghi that the ECB is not going to be buying Spanish and Italian bonds. So clearly the worries have set in that the June 29 statement could be flattering to deceive.
However, I think that as we go towards the end of the month and the FOMC August 1 announcement, I think you will find some zest coming back into global markets. There are widespread expectations of QE being pushed through at the August 1 FOMC announcement. As you get towards the end of the month, I think global equity markets will rediscover some of their vigour. Q: There has been quite a bit of vigour in terms of flows. Some of it has been company specific blocks. Money has been strong. What have you made of that? Where is it coming from? Is it hot money or are you sensing some more interest now in the Indian market from the long only guys?
A: I think interest in high quality names has been there throughout. It is very notable that amongst the large emerging markets, we are really the only market to attract these sorts of flows pretty much consistently through this calendar year. Russia, China, Brazil are nowhere near the sorts of flows India is attracting and there are two broad buckets, one is the large global long only coming into big blocks of largecap stocks.
We saw some of that last week with the Axis’ and the Cairns’ of the world. So that’s the large global long onlys money and a lot of the rest of it is hedge fund money, hot money coming in via P-notes. The government’s desire to give clarity on GAAR is helping on that front I believe. So these are the two buckets. One is global large long onlys coming into blocks and the second lot is the usual hot money seeking short-term profit. Q: Is it too early to get worried about the monsoons or do you see it as a risk factor for the equity market?
A: It’s a difficult call to make. Clearly the Met department is saying that so far the monsoon has been deficient, but they are asking us to still maintain some hope that July could work out. The reason we are not hitting the alarm button is twofold - one is MSPs have gone up quite a lot this year, which should give some sustenance to the rural story and also crop and food prices around the world are hardening. So that’s giving us a bit of mitigating comfort that the monsoons as yet are not a cause for huge alarm. Q: So base case, a market that’s rangebound or do you see some upside for this month?
A: I think we will stick to our 18,000-19,000 target by year-end April and I will clearly suggest that 17,500-18,000 level is where we are probably going to top out sometime this month. A lot will depend on August. Around six weeks of intense political activity is coming up kicking off with the presidential elections on July 22 then the Vice-presidential elections of August 7 and then Parliament session. Whether we raise our 18,000-19,000 target for the Sensex does depend on this six week of intense political activity. These are 45 destiny defining days for the UPA administration. Q: IT is the big one this week with Infosys and Tata Consultancy Services (TCS) both on consecutive days. Market is going in, not expecting too much but is there room for disappointment still?
A: What has become very clear over the last year is that in Indian IT, there run out two very clear business models, one is a business model which works and the other is a business model which doesn’t. I think HCL Technologies and TCS’ business model seem to work, it is able to generate growth in business even in these difficult times. Accenture showed two weeks ago that if you get your business model right, you can grow at quite healthy rates in this environment.
So I expect TCS and then subsequently HCL Technologies to have a decent earning season. I expect Infosys and Wipro to continue disappointing. Whilst the depreciation will give healthy rupee earnings, dollar numbers and especially dollar guidance is what the market will look at. So we continue backing HCL Technologies and TCS and we continue having sells on Wipro and Infosys.
_PAGEBREAK_ Q: Specifically for Infosys, do you think it is just a situation of the dollar revenue guidance getting scaled back or is it they are facing bigger problems on the volume front that they earlier indicated or expected?
A: Our sense is that the type of model that you need to generate volume growth in this business is with a heavy focus on remote infrastructure management with a shift away from application development and maintenance with a focus on enterprise application services. These are strengths that Infosys doesn’t quite have in the requisite amount and hence they are finding it quite difficult to rustle up business in what is clearly a demanding macro climate.
But that inability to have the skills and strengths required in this demanding macro climate, I think is the core underlying driver of this relentless pullback in guidance that we have seen from Infosys over the last few quarters and I don’t expect this quarter to be any different. Q: What is the key downside to this market over the next few weeks? Do you think it is still global or any of the local factors like monsoons or earnings or lack of policy momentum over the next few weeks that might take the market back to where the rally started?
A: If you look at global markets over the last couple of months, it is pretty clear there is strength there across the world and a lot of that strength is on the back of greater expectations of liquidity, greater expectations of QE. I think some of that has been met and some of that will be met over the next two-three weeks. Where India has stood out is we have outperformed a little bit is because of the sort of positive talk emanating from New Delhi.
If that positive talk doesn’t amount to too much over the next month, if for example, the Congress doesn’t have a good outing at the Vice Presidential elections, that is when we could really relatively see a big crack emerging in the market perhaps the Sensex giving up 1,000-1,500 points if the VP elections don’t go the UPA’s way.
Even after that, once they enter Parliament, once they push through diesel price hikes and FDI in retail, how the government deals with the politicking will be quite interesting to watch. That is the big upside, downside mix that the political events in August is where either we will gain another 1,000 points or perhaps give up 1,500 points on the Sensex. Q: What do you do with banks now? Last week, the Nifty was up half a percent but the bank Nifty went up 3%. Do you think this outperformance will continue because you guys have been underweight and cautious about banks for a while?
A: For starters, we don’t expect the Reserve Bank of India (RBI) to cut rates any time in the next three months. There are some people in the market who were building in rate cuts on July 31’s policy, I think that is a natural negative catalyst for banks that will come through. That apart, the key driver of banks’ results over the last two-three quarters has been their simple unwillingness to report genuine asset quality by mixture of restructuring, by mixture of refusing to recognise underperforming assets and restructuring, banks are able to report handsome growth in EPS especially the larger private sector banks.
Now at some stage this edifice will either have the market say let us focus on real underlying economically viable assets or the regulator will have to step in to make a statement. I think we are already seeing some of the larger banks’ CMDs, the public sector CMDs trying to take a stance on this issue.
So negative surprise on the interest rate side, real challenges on asset quality continuing are the two main reasons why we remain circumspect on banks. Yes, I do see value in some of the better names in the sector like Bank of Baroda, Federal Bank amongst the smaller banks and ICICI Bank amongst the larger private sector banks but these are all exceptions. This is a sector which we remain deeply worried about. Q: You have got a lot of midcaps that you are positive on. TTK Prestige reported their numbers today and they looked pretty good. What is the call on that stock and what kind of price target do you guys have going?
A: I have to admit that on a price target front TTK Prestige is pretty much where we thought it should be. A year ago when we looked at it, it came in around 20% upside. The bulk of that has come through. Now the critical thing for TTK going forward is can they expand their Indian franchise into something bigger, can they buy a meaningful business in Europe, buy a brand, buy some distribution and take this business global?
Our hope and our sense is they have the cash flow strength, the management bandwidth and the pedigree to do so. If that comes through that is exciting, the stock could well and become the next Titan. If this management is able to articulate more global growth plans, it is one of the most impressive companies out there in midcap today. Q: You like Cummins as a story. Take us through what makes it attractive for you?
A: What we are hearing is that the government will embark upon a fairly major thrust on exports. That is the only way they believe they can deal with the current account deficit crisis, it is also one way the government will use to re-inject some zest into our investment into our capex story.
If there is an export story of the government for example it focuses on SEZ and tries to give them an uplift, Cummins as a supreme export franchise comes into the forefront, with world class brand distribution, global distribution, world class technology hence beautifully placed to play an emerging export story. I think you will see increasingly there is plenty of noise emerging from Delhi on the export front; this stock will naturally rally on the back of such a thrust. Q: There has been some heartburn around autos as a sector particularly after the kind of sales strength we have seen. Are you still positive on Tata Motors?
A: Yes, their valuations are still fairly sensible, the global luxury car markets seem to hold up and I don’t think JLR will be any exception to that strong demand for luxury cars around the world. The other trend you will see in Indian auto is, we will gradually become an export hub both for small cars and for auto components.
Tata Motors has got a decent small car and could well play a role in India becoming an auto export hub. We will stay positive on the name, the main driver at the moment, I admit is JLR and I hope that the earnings strength that we have seen over the last two years will hold up inspite of the downturn in China. Q: The big correction in Exide is done. Do you think it is time to start loading up on that stock again?
A: Exide is a supreme franchise for as long as I have been in the market, almost a duopoly player alongside Amara Raja Batteries. There was plenty of talk two-three months ago of Exide giving up market share in the replacement battery segment of taking price cuts and so on. We are now seeing price hikes comes through from Exide.
The pricing power we believe remains intact and something like Rs 160-170 is where this stock should be. If you want to buy a straight forward high quality name which gives you exposure to the eventual recovery in the auto sector, Exide is as good as anything. You will see this is a multibagger, has been over the last ten years and will be over the next ten years. Q: What do you hear from people investing into India right now? Is it a call of relative outperformance compared to the rest of the pack or is there a call that valuation wise they think this is a great market to get into and there is going to be very strong returns going into the next year if not the second half of this year?
A: Paradoxical way we are a bit like the FMCG in the emerging markets context. We are seen as a bit of a safe haven. The Chinese downturn is taking everybody by surprise and people who follow China, have invested in there for decades are surprised by the speed at which the Chinese economy is cooling and obviously if this continues in Brazil and Russia, to some extent Indonesia will attract sympathy because they are such large suppliers of commodities to China.
That will leave us with the only large emerging markets with a viable robust internal demand story. If the government is able to come to the party on political reform so much the better. But at the moment, even without the government coming to the party, a bit like what FMCGs are to local investors, we are to global emerging market investors, the one safe haven in a world where growth seems to be coming off quite rapidly everywhere particularly in China.