Budget 2013: Axis Cap estimates concentration of volatility in Q1-2013

Nandan Chakraborty, managing director, institutional equity research, Axis Capital explains to CNBC-TV18 that there was little expectation for 2012 to be an eventful year. He adds that with the temporary resolution of the fiscal cliff and the return of the growth momentum in the Chinese economy, there could be an increase in volatility in the first quarter of 2013.

Below is an edited transcript of the analysis on CNBC-TV18 Q: What’s your outlook for 2013? Do you think it will be an encore of 2012 or your views are mixed?
A: The year 2012 was good but it was very unexpected. We must admit that the global and local events which were not foreseen. Stocks got too cheap and therefore the market went up for quite a sometime. So while the market went up, not too many investors made a lot of money.
What I hope for in 2013 is that the New Year will offer some sort of predictability and the market is not blinded by any bad news especially from the Budget and so it is a smoother ride. I think a lot of the volatility could be concentrated in the Q1 of this year because of two reasons – One, the impact of the resolution of the fiscal cliff is yet to take effect which means that money will move out of US Treasuries and into US equities and the emerging markets.
Two, is that now the business plans will be frozen because half the elections across the world last year were over and that will provide another leg-up.
The third is the initiatives by the Chinese government that impacts both manufacturing as well as all commodities. So, I think there is a lot of good news which is still to come through. I think all that is still too happen in the Q1.
On the other hand, domestic investors will still be jittery in February jitters about the Budget. The interest cut, also if it is to save us from problems in 2014, needs to have at least a 9-12 months lag before it actually permeates down to the economy, especially because even then in the banking system it has taken time for the benefits to permeate. Therefore, I think the Q1 will be very important and generally, I think it should track earnings growth rather than any severe down-rating or upward-rating of the upgrade of the index. Q: You said that further PE rerating might be difficult. Are you saying that the markets have actually probably priced-in quite a bit of the good news through the last few months and therefore unless earnings start accelerating further significant up moves will be difficult to justify?
A: A year from now, earnings will be at FY15-levels which is after the elections. If you make an estimate of 15 percent EPS growth in any average year, the earnings track roughly about 15 percent earnings growth. Any severe downgrade I would see only if the finance minister has political compulsions due to elections and therefore the fisc gets into a problem and any upgrade I would see only if there is a massive recovery in the world economy which therefore opens up capital flows into India. Q: It’s interesting that you expect to see volatility in the first quarter of this year because the consensus seems to be leaning towards the fact that this is the patch where the market rallies to a new high. Will the market’s movement be that unidirectional in the first couple of months?
A: Volatility is not necessarily on the negative side. I do expect the market to make a new high. I am just concerned about the pre-Budget jitters in February. So there could be a sharp run-up in January and be aware of what's happening in February. But between January and February, the average would be much higher. Remember, that most of the divestments are also slated for February. So there is high pressure in February and there is great news in January. Q: Infosys is one the top 10 risk-rewards for this year and it is interesting to note that the stock has probably been the biggest underperformer last year. Do you think the time has come to start looking at that stock?
A: There are three or four stocks which will find it very difficult to recover after being a underperformer, for a relative investor. These include Reliance, Infosys and high-weightage stocks like ICICI, Housing Development Finance Corporation (HDFC) and ITC.
These stocks offer a fantastic risk-reward with a downside of not more than 10-15 percent at the most and the upside is upwards of 25 percent. So Infosys, as an example, offers an upside of close to over-40 percent and a downside of not more than 12 percent.
The reason for this is that on the downside with the cash and the price-earnings (PE) that Infosys has that the company has- the minimum PE that Infosys should have with the cash balances is an opposite of the long-term yield in a bond, which is 12. And on the upside, it has the most to gain from an increase in operating leverage. Q: Do you think 2012 has lulled investors into a sense of complacency that all the global risks has been resolved and 2013, from that perspective, should be okay?
A: The problem has been and central banks across the globe have shown tremendous commitment to support their respective governments which has reduced the probability of the economic situation turning awry and haywire.. Q: What is your opinion on the whole NBFC cluster including the gold finance companies, going into 2013?
A: There are two aspects – the regulatory aspect and the position of liquidity. Infrastructure, consumer durables and whatever goes into financing of these sectors should generally do well in a pre-election year. So, I think we are very bullish on NBFC and banking in terms of earnings growth as well as ratings. Q: What about the public sector space? Do you sense a lot of excitement from global investors after the National Mineral Development Corporation (NMDC) offering?
A: Yes, I do. The PSUs are generally well-governed companies and because their float increases the weightage, the indices also increase and then it becomes easier for foreign investors to invest because they want large chunky deals with India having a small market-cap in the global context. Q: Your preferred pick from the banking space is ICICI Bank. You think that’s the one that’s got the greatest growth potential?
A: Yes, ICICI Bank is a top pick among those best 10 risk-reward bets. Q: What's the situation on Bharti that makes you positive about it this year?
A: It is due to a a combination of regulatory benefits. In most consumer items, there is a wave of volumes going up followed by margins. There have been regulatory changes and the government obviously needs the telecom sector to revive because the spectrum auctions have to generate funds for the government.
The telecom has reached a stage where competition is decreasing and therefore Bharti should be able to do far better than now. A lot of the regulatory concerns are also decreasing. So, it offers a double benefit to Bharti. Q: What about media? Why are you are not bullish on the sector going into 2013?
A: We are bullish on media because I think that's one segment where a lot of change is going to happen. But if you look at calendar 2013, parts of what was known has  already been discounted in the ratings. There have already been runs in many of the sectors. There sectors yet to post a run include PSU banks, NBFCs, telecom, mid-cap realty, mid-cap engineering infrastructure and the IT industry. Q: What are your biggest underweights going into 2013?
A: I am heavily underweight on FMCG and cement.  I am underweight on FMCG because of the combination of very sticky inflation and a bad rural market this year.  So let’s hope the rabi season turns out to be very good.  The other factor is high valuations. FMCG actually benefitted from the fact that it did well even as the other sectors were not doing well.
Cement has been ranked 'underweight' because cement prices are falling and I think the sector has been overvalued. Q: What is your opinion on Tata Motors on which but there are concerns regarding the company's valuations in pockets and the manner in which sales has been trending and the management themselves are guiding to a very flat year?
A: Most of the valuation in Tata Motors is in the global context. This is a risk-reward bet where the downside is limited compared to the upside which can be phenomenal. The company is in discussion about massive expansion in a dealership in China for Jaguar Land Rover (JLR). There is severe discounting all over the world in United States (US) and Europe markets in any case and there is a massive operating leverage that’s comes in out of growth in Tata Motors.