Need diesel price hike of atleast Rs 5/L now: Antique

A quick-fix solution for India’s fuel subsidy problem is urgently required says Rohit Kothari of Antique Broking. Kothari believes a move to rectify the negative sentiment around the country’s macros, more specifically the huge current account deficit (CAD),  is by hiking diesel prices by atleast Rs 5 per litre.

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In order to make the move less anti-populist, the government can hike diesel by Rs 3 followed by Rs 1 per litre for next two months.
Additionally, on the steep fall seen in the rupee, Kothari says the market is unlikely to correct until the currency stabilizes. Kothari’s views come on a day when the rupee hit its all-time low of 65 against the US dollar.
On his expectation from the market, Kothari maintains his 2013-end Sensex target of 19400, but expects the financial space to drag the indices lower. Below is the edited transcript of Kothari's interview to CNBC-TV18. Q: What is your sense of how much downside there is to this market after the fall that we have witnessed already?
A: This is a very difficult question because this all hinges now squarely and purely on the Indian rupee which has over the last few days lost all its technical support. Until and unless we get a quick fix on the rupee to stabilise, there is every possibility that we may see a constant downward correction both in the index and on the sideline stocks.
The confidence levels are at probably all-time low and the situation currently in the financial markets is at an unprecedented levels. So many are equating this with the 1991 crisis when India had to pledge gold but the time today, the crisis in terms of the sheer absolute numbers of current account deficit (CAD) is staggering.
The government and the regulators will as soon as possible need to fix this to restore confidence. And there is some light at the end of the tunnel to fix that if certain steps are taken at the right time.
What we require currently is a quick fix on this fuel subsidy. So, Rs 5-7 diesel price hike followed by some more clarity on foreign direct investment (FDI) in insurance and telecom which can bring in about USD 5 billion is required.
A quick Hindustan Zinc sell-off can garner USD 15-20 billion cover for the government but besides that the CAD which would be in the region of USD 100 billion minus the non-resident Indian (NRI) remittances still leaves a good USD 35-40 billion of deficit and unless and until the country is able to garner at least a USD 25-30 billion in terms of some sort of a quasi-sovereign bond or a government bond or an NRI deposit scheme, there is not a easy fix to the problems in the currency.
It is good to be in a market where one can have a bottoms up approach and we prefer a bottoms up approach for a stock but the underlying fundamental here so dependently is on the rupee which needs a quick fix. Q: A lot of your peers have started to scale down their year-end targets on the index and many believe that even 4,700-4,800 on the Nifty will not surprise them, where do you think the range of this market has moved to on the downside?
A: In terms of Sensex target, we still believe that the earnings per share (EPS) will be closer to Rs 1,295-1,300 for the Sensex stocks and roughly 19,400 is a possibility but with a caveat on the rupee. Coming back to Nifty which is hovering around 5,250 mark, given the way the rupee has slid, most brokerages including us will be forced to revise the EPS target because this fall in rupee barring a few sectors like IT and pharmaceutical companies will lead to a cut in the earnings. The Sensex target of 19,425, which we refer as a 15 times current year earnings, can easily get corrected if the current fall in rupee is not arrested.
Coming back to Nifty, close to 4,600-4,800 is not an impossible target. So, anywhere from 4,700 to 5,400 is the range of Nifty which we should not be surprised to be in.

Q: If this market does tend to move lower and we do see another leg of a downside, which are the sectors that would lead it on the way down you think?
A: I still believe that the entire financial sector will still lead the downfall because when there is a crisis of confidence, one suddenly starts doubting the balance sheets and when that doubt and fear happens, it finds very little valuation support. We have seen that happen in 2008 at the time of Lehman crisis.
While I believe that, in the Indian financial private sector, there are some banks which are still doing outstandingly well in such times but it may still not be enough for the entire banking sector to hold on. So, I would say that the banking sector followed by again the beaten down infrastructure sector will lead the downfall this time. Q: You are at an energy conference today and I guess some discussion will hinge around how much of a diesel price hike the government maybe able to push through after the parliament session gets over, you spoke about Rs 5-6, do you think that is likely or it might be just a Rs 2.50-3 which is five-six months worth of diesel price hikes club together?
A: You are dead right. We would like it to be atleast Rs 5 because with the exchange rate of 64/USD and Brent Crude hovering around USD 109 per barrel, diesel under-recoveries today would be in the region of Rs 13-15. So, even a Rs 5 diesel price hike barely suffices what we require.
But given the political scenario in which we are in and given what the government would perceive as a burden on the common man, we are not so sure that a Rs 5 hike is plausible. However, Rs 3 hike with a Re 1 monthly hike seems more doable.
Whether it happens or not, or how quickly this happens, is a bigger question because on a monthly basis otherwise the fiscal deficit further balloons by close to USD billion which at this point India is not in a position to face.

Q: Since we are talking about oil and gas stocks just wanted your thoughts on two stocks and whether you see more downside there, Oil and Natural Gas Corporation (ONGC) which is already down about 14 percent this month and Reliance Industries which has now started to crack?
A: ONGC remains Antique’s top pick and we still believe that ONGC at the current levels offers great value. What has led to this 14 percent fall is the sudden depreciation of rupee which was not exactly expected.
Otherwise we are at all-time high realisation and with what the Finance Minister perceives to bring the fuel subsidy under control, ONGC looks to still be at this point inspite of all the subsidies it has to bear. The stock is still at current year 5-6 times earning multiple. And this level of value is something at which we remain to be bullish.
Coming to Reliance Industries, it had a crack of close to 15 percent over the last month and we actually believe that Reliance is one of the best manufacturing plays going ahead. The recent rupee devaluation leads to expansion of all its manufacturing margins and coupled with that over the next three years, Reliance is going to see huge addition to capacities both in refining and in petro chemicals.
Inspite of everything else, Reliance is now trading close to 1.1 times FY15 book and at close to 10 times multiple. So, whatever we may say, an asset of the size of Reliance is not going to be created soon and the valuation multiples offer great support. So, we continue to be bullish on both ONGC and Reliance at the current levels.