Mkt to post 15-18% returns in 2013: Prabhudas Lilladher

Sandip Sabharwal of Prabhudas Lilladher is bullish on Indian equity market and expects 15-18 percent returns this year. Locally, bottoming out of economic growth, aggressive easing of policy rates by the central bank during the year and low earnings growth expectations for next year will be some key factors that would help the equity market perform better.

Globally, the European economy is in a better situation than last year. Further, inflows in emerging markets will still be very strong driven US dollar and Japanese yen carry trade, he added.

This year will also be positive for the Indian currency. "I do not believe in the forecast which says that rupee will go to 59.60/USD. It will end higher than where it started off."

Below is the edited transcript of Sandip Sabharwal’s interview with CNBC-TV18.

Q: I was reading your annual newsletter, which begins with a title ‘the bull to the fore’, what kind of bullishness in 2013. You call 2012 right, I think you expected a 25 percent rise in equities and it has delivered, can we deliver even from these elevated levels?

A: At the beginning of 2012, there was all-round pessimism, people were very negative and valuations were very cheap. We saw the markets rallying and that was my expectation. This year will be a very good year because this year we will see a combination of several factors, which will come to help the market. The first factor is that the growth has bottomed out and growth will start recovering from hereon.

Secondly, this year monetary policy will support the markets. Ten-year bond yields have gone below the repo rate. I am not very sure about the facts but a lot of my friends who are in the debt market told me that this has never happened in the past. This shows that Reserve Bank of India (RBI) is behind the curve. We could see aggressive monetary easing going forward.

The third factor is that earning growth expectations for next year are too low. There will be moderation in input cost pressure and there will be an improvement in operating leverage. All this will help earnings growth next year. On top of that we have an external scenario where we have seen that the European situation looks much better off than what it was last year. Monetary conditions have eased significantly out there, which will help European growth this year where there is extreme pessimism around European growth.

US will be a slide drag because of the fiscal issues but monetary policy will continue to support. The big factor this year will be that money flows into emerging markets will still be very strong driven by two carry trades both the US dollar and Japanese yen carry trade. Japanese yen has started a movement, which will take it to around mid-90s this year and that will be a very strong factor for yen carry trade. All these factors combine will be good for the markets. At the base case, I expect 15-18 percent return this year.

Q: Equity markets moved quite strongly in 2012 and it did not move in line with what we saw in the currencies because that was pretty much supported by the capital inflows that we saw. How exactly do you think the currency is going to pan out in 2013, what sort of levels do you expect for the rupee and would you see any sort of correlation with the equity markets at all?

A: There will be two factors which will drive the rupee; one will be what the government does on the subsidy front. The recent proposals of a phased hike in diesel prices, if implemented, will be very positive for the rupee.
Second is the monetary policy stance of the RBI, which I believe will turn dovish this year and will support the rupee.

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Contrary to traditional views where people say that the rupee requires yield support, the rupee needs growth support. Despite the extremely competitive currency, why are Indian exports not picking up? The main reason is that our competitors abroad are able to get export credit or various forms of credits, working capital credits at levels which are in low single digits.

Indian exporters who are in the small and medium categories have to borrow funds at 12-13-14 percent. Even if your currency is competitive, you have such high interest rates, there is no way you can be competitive in the current global scenario. As interest rates ease out, we will see that there will be an export pick up and as that happens, that will also help the rupee. Overall, this year will be positive for the rupee. I do not believe in the forecast which says that rupee will go to 5,960. It will l end higher than where it started off. Exact levels are difficult to predict.

Q: What is the view that you have on the telecom space itself, are you going to see an improvement in their fortunes with some realism coming into spectrum pricing?

A: The telecom sector has bottomed out and the competitive intensity has topped out in this sector. Pricing power is coming back to some extent and with the advent of the entire smart phone phenomenon; data usage is already moving up exponentially and will continue to move up.

Telecom stocks would be good contra bets for this year and the valuations are not all that expensive in this sector. Some of the stocks in the sector also have issues related to high debt and high interest cost.

Q: Any particular stocks within the telecom space that you would like to recommend to investors from current levels?

A: I would not like to recommend, but looking at the segment, the riskiest stock could be the best bet.

Q: Isn’t that the strategy that you are recommending to investors as a whole, in your annual report you have written that basically you would like to recommend valuations, which are a little cheap in terms of – and it might just be a time for the broader markets or midcap stocks which have lower valuations to see some amount of notch up in 2013?

A: Investors do not have to take too much risk. There are enough established midcaps with strong business models, which are trading very cheaply and they have got impacted because of slow demand and high interest rates. If investors just focus on them, there is enough money to be made.

Q: Sectorwise is there any preference for instance in public sector banks, what would be your sectoral – I understand it has to be bottom-up, but sectorally what would be the preference and would you be a seller in fast moving consumer goods (FMCG) and private banks?

A: FMCG is highly overvalued and I do not think these valuations can sustain. So, the stocks will go down or move sideways is something we have to see. Pharmaceuticals broadly as a sector looks overvalued given the fact that the main patent expiry cycle is coming to an end. These companies might face some issues going forward.

Public sector undertaking (PSU) banks are very well placed. Private sector bank valuations have moved up, but it is very strange how banks are valued. Even though valuations might be high, if they come out with a follow-on public issue, which increases their book value then the stock starts to move up. I would not say that one should be negative on those banks, but public sector should outperform private sector this year.

Third would be auto stocks where valuations are not all that expensive. Some of the stocks have done well, but here again we will see that some operating leverage will pick up as interest rates come down in volumes pick up. Overall, lower interest rates do benefit these companies. This sector should also look good.