Expect FY13 EPS growth to be 0-5% over FY12: Ambit Cap

After expectations of an RBI rate cut was smashed, the markets tumbled. Saurabh Mukherjea, HD-Equities of Ambit Capital is of the view that the markets have been going through a volatile situation and though, results from Greece were positive, market sentiment continues to remain weak.

Mukherjea tells CNBC-TV18, he is optimistic about the market and feels, positive cues like the appointment of a new finance minister can boost the market to some extent. He also expects EPS growth of 0-5% over FY12 for the year ending March 31, 2013.
Despite the market not performing well, Mukherjea advises people to buy the good and clean portfolios that have consistently been able to outperform. He improvises a strategy of going sector by sector while choosing the strongest players in each segment. This according to Mukherjea would give you stocks that have beaten the market by around 21-22 percentage points over a 14-15 month period.
 
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: Does this make banks attractive or do you think the lack of an action merits this kind of a fall and maybe even EPS downgrades will follow?
A: We have been underweight on banks as a sector for a long time and we continue remaining underweight on banking. There are plenty of Indian banks to worry about at this juncture, credit quality, lack of liquidity in the system, lack of credit offtake. I don't think there is any great rush to buy banks.
Even if we go into a modest stock market recovery, which is our base case expectation for the rest of FY13, I think the case for banking sector as a whole is relatively weak. There are a few select banks such as Federal Bank, Kotak Bank, Bank of Baroda, where we are more optimistic, but those are exceptions rather than a norm in the banking system. Q: I was asking this tactical question to our previous guest, about the rally being over at least in the near-term, we have had the Reserve Bank of India (RBI) event and it surprised negatively while Greece has been positive, which looks like sell on news kind of a situation. If the Fed were not to surprise positively, do you think the tactical run is over for the near-term and we could be staring at those 4,800 levels again?
A: If you look at global markets today, every market is up 1-2%. We are the only exception and that is because what the RBI has done, it has to be termed as a mystifying position that they have taken. But leaving the RBI aside, I think the 6% bounce that we see over the last couple of weeks has been more global than local.
Whether the Fed intervenes or not, I think the chances of the ECB intervention are fairly high. So either the Fed or the ECB, all moves towards the banking union by the European union as a whole, at the end of the month’s summit will give a range of positive catalysts to look out for.
Looking further out into July, appointment of the new FM, and we are strongly open for a technocratic and more reform oriented FM to take charge, should be another modest catalyst to the Indian market. I think that there are grounds for optimism in the near-term. I don't think we will have a run away bull market here but there are grounds for optimism and there are grounds for belief in the 6% up that we have seen over the last two weeks. It still has some way to go. Q: On the flip side, there are some economists who are bringing down their GDP forecast not necessarily because of RBI, but certainly buttressed by the lack of a rate cut from the RBI. Do you think there would be a case for EPS downgrades in some sectors because probably investors had penciled in some kind of a cheaper money, cheaper interest rates? Also since you are saying this is buy time if not for banks, where are you buying, what are you buying?
A: In terms of EPS for FY13, we expect EPS to grow by around 0-5% over FY12. The consensus figures seem to be more like 10% up and to the extent that the consensus figure is a touch over optimistic, I think by the end of Q1 earning season, the consensus figure will come down by around 500 bps. Whether the RBI had cut today or not, I think there was still a touch of optimism on the consensus numbers.
Against that backdrop of earnings weakening and the growth momentum in our country being sluggish at best, what are we buying? For the last 14 months, we have advocated these good and clean portfolios that have consistently been able to outperform.
What you are doing is, identifying strongest players sector after sector, the champion players from each sector are selected and we are asking clients to buy them almost on every possible dip in the market. So over a 14-15 months period, they would have beaten the market by around 21-22 percentage points.
Even for example, we are underweight on banking, but if clients do need to have some banks in the portfolios - given how big a sector it is - we will point them towards an ICICI Bank, Kotak Bank, Federal Bank rather than say an SBI or an Axis Bank.
That is the approach by quality, by champion players in every sector. We underweight the dramatically cyclical sectors like the power, infrastructure, constructions sector. We are overweight on consumer, auto, auto ancillaries, light industrial consumer durables and buy champion plays across the board. That is a strategy we will continue to advocate through the rest of the year.