Mkt's climb to get tough, FY14 Sensex EPS to fall: Religare

Nifty is barely 5-6 percent away from all-time high level but the market is unlikely to sustain at current levels because the macro overhang is just too real to ignore, says Tirthankar Patnaik of Religare Capital Markets. He expects Sensex EPS to also go down from current levels for FY14, he adds.

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According to him, earnings will get downgraded, markets will respond positively to policy news which will be on multiple sides but until there is earnings support, markets would remain range bound. That range has been around 5500 to about 6100, with just temporary overshoots, he adds. He feels market may see some correction in second half of October.

On specific sectors, Patnaik feels banks will see earnings downgrades going forward, IT and pharma on the other hand may see earnings upgrades. He tells investors to remain cautious while putting in fresh money into IT and pharma, though he is not worried about run-up in the two sectors.

On domestic data, he expects IIP to stabilise at 1.5% level and FY14 GDP growth to be in range of 4.5-4.7%. According to him, July IIP number is not sustainable.

Below is the verbatim transcript of Tirthankar Patnaik's interview on CNBC-TV18

Q: It has been a fun September series for the market all the way to that 5900 level and now we are just about 5-6 percent away from our all time highs, what is the sense you are getting about October, do you see this Jubilant Foodworks trend continue or are we going to fall flat?

A: The top-down view would tell you that the party has already lasted longer than it should have but yes one could see numbers going up for another one-two weeks as the Federal Reserve (Fed) postponement of the taper actually settles in on the global markets you will still have liquidity coming in.

For the domestic investors September does happen to be the monthly, quarterly and the half-yearly closing. So some amount of positive there, but beyond that we don't believe that the market should sustain at these levels purely because the macro overhang is too real to be ignored.

Q: What about earnings itself because Sensex EPS’s have already been downgraded by about 10 percent or so. Where are you in terms of Sensex EPS and are there another round of cuts expected?

A: Yes I would expect that Sensex EPS should go down from current levels also. tWe are slightly lower han consensus at about 1250 levels for FY14. The way I would look at it, FY12 saw the Sensex EPS being downgraded nearly 9-9.5 percent over FY11. FY13 was where the EPS was downgraded just about 1 percent from the beginning of the year and this year we have already seen a 10 percent drop.

Pair that with the markets, FY12 saw a big drop in the market about 8-9 percent. FY13 actually saw a rise up and FY14 has been all over the place. We might end the year at about 5 percent growth - pretty much on the line of what we saw in FY13, so more downgrades going forward.

Q: Do you think the bottom of this market is in place or may have even moved up one because of the rupee stability and two because some policy measures are coming in, after all we heard about coal block auctions?

A: Well policy measures are coming in, I would rather see policy measures as a response to what the market is doing unfortunately so rather than as a leader. So I would not expect the market to respond positively to what it had engendered in the first place. The way I am looking at it, we would expect the markets to remain range bound unless there is a significant improvement on the macro rather than just the sentiment bit which is coming out from policy news, moving the markets up on a valuation multiple basis.

So the way we would look at it is earnings are getting downgraded, markets do respond positively to policy news which is on multiple sides but until we have earnings support, one would expect the markets to remain range bound. So that range has been around 5500 to about 6100 as we have already seen with just about temporary overshoots. So in that light we would be at the top end of the range really.