Edelweiss bets on IT, pharma; sees Nifty swinging 600 pts
Sharp deterioration in revenue growth of India Inc's Q4 earnings is definitely a concern. Khemani's Sensex EPS forecast for FY14 is Rs 1340.
June 06, 2013 / 17:36 IST
Harsha Jethmalani
moneycontrol.com
Global economy is not yet out of the woods. Given the fragile US economy, US Federal Reserve is unlikely to withdraw QE in a hurry, says Vikas Khemani, President & Head- Wholesale Capital Markets, Edelweiss Financial Services. However, if expectations of an immediate QE tapering gather momentum, then the Indian rupee may breach 57 in the near-term.This uncertainty in global environment and lack of key triggers on the local front, will keep the Nifty in 5500 - 6100 range this year."Capital outflows in case of global risk aversion is certainty a significant risk for Indian equities. Apart from that, political uncertainty - the heavy election cycle in second half of the year may rise which could hurt investor confidence," he told moneycontrol.com.Meanwhile, a sharp deterioration in revenue growth of India Inc's Q4 earnings is definitely a concern. But a moderate recovery to the extent of 10-11 percent growth in India Inc earnings can be in the offing on the back of lower raw material costs and falling interest expense. Khemani's Sensex EPS forecast for FY14 is Rs 1340.On sectors, Edelweiss is overweight on consumers, IT, pharma and private sector banks.Below is the edited transcript of Vikas Khemani’s interview with moneycontrol.comQ: There are expectations that this global liquidity gush will continue and Fed may not taper QE in June, do you agree? Will Nifty touch its all time high of 6530 this year? What is your year end target for the Sensex?A: I do not think that the US Fed will be in a hurry to taper off QE. The incoming data has surely improved, but overall picture still remains mixed. Besides, there is going to be a strong fiscal drag in Q2 and Q3 which can jeopardize the nascent recovery in the US economy. So I feel that QE policies will continue for some more time. Given several uncertainties around global and local factors and pace of recovery, I believe that the market will be range-bound, in the range of 5500-6100 this year.Q: What did you make of fourth quarter earnings? What is your earnings estimate for next year? How are you positioned in the market now?A: The fourth quarter earnings were weak. However, margin expansion was positive. EBITDA margins expanded 40 bps yoy for our coverage universe mainly led by lower raw material prices. We expect this trend to continue going forward. The sharp deterioration in revenue growth is definitely a concern. Going forward, we expect a moderate recovery to kick in, and this accompanied with lower raw material costs and falling interest expense, should result in around 10-11% earnings growth. Hence, our Sensex EPS forecast for FY14 is Rs 1340. In terms of sector positioning, we are at present defensively positioned, with overweight on Consumers, IT, pharma and private sector banks._PAGEBREAK_Q: The rupee has weakened to a nine month low of 56.18/USD. Will it see 57 anytime soon? If it does, do you see it sustaining there? Will India continue to attract more funds going ahead?A: INR is weakening primarily on two factors. First there is a secular trend of USD strengthening in the global currency markets, possibly reflecting concerns regarding the tapering off of QE by the Fed and second, India’s current account deficit remains at elevated levels. In fact globally, while all EM currencies are witnessing depreciative bias, high CAD currencies have seen more pronounced weakness. In near term, the key factor that will influence INR is the assessment of the QE policies of Fed. If the expectation of QE tapering off soon gather momentum, INR may breach 57 in the near-term. However, from medium term perspective, INR should be well supported as India’s macro vulnerability is reducing – fiscal consolidation is well on track, inflation has declined substantially and falling commodity prices means that CAD should start to narrow.Q: Are you also anticipating a cut rate in June? Would you advise betting on rate sensitives now? From the broader markets, do you like any stock at current levels?A: Yes, I do anticipate a 25bps rate cut in June, although I must add that in case May trade deficit widens sharply, the RBI may like to take a cautious approach. But generally speaking, we do anticipate rate sensitive sectors to do well as further easing takes place.Q: Apart from reversal in FII inflows, is there any other key risk to which the market may to react negatively?A: Capital outflows in case of global risk aversion is certainty a significant risk. Apart from that, I would say that political uncertainty as we enter the heavy election cycle in 2H of the year may rise which could hurt investors confidence. Apart from that a poor monsoon season could jeopardize the nascent recovery as it will revive inflation concerns. Q: Do you see things improving on the macro front? The GST has been ruled out till the next government is formed, are you expecting any key reforms before elections? A: As pointed out earlier, macro situation has certainly improved since September 2012. We have made decisive progress on fiscal consolidation, inflation has eased quite substantially and government is trying to de-bottleneck the investment cycle through CCI (Cabinet Committee on Investments). Of course, it will take time before things turnaround at the ground level. As regards GST, while the FM has made some progress, particularly with regards to compensation to states for the revenues foregone, there are still disagreements with regards to the revenue neutral rate for GST etc. In next six months, government should work towards clearing Land Acquisition Bill. We need structural reforms to improve productivity and reduce regulatory uncertainties but I guess given environment might not happen in current tenure of the government. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
