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Last Updated : May 09, 2013 01:43 PM IST | Source: CNBC-TV18

Liquidity to be benign; underweight on IT except HCL: Ambit

Pramod Gubbi, VP-Sales, Ambit Capital said since the liquidity inflows are likely to remain steady going forward for India, the market see some gains on back of that. However, market could see some consolidation in the near-term, he added.


The recent rally in Indian equities has been mainly driven by foreign inflows. India has managed to attract nearly a billion dollars from foreign investors this month, and liquidity flows are likely to remain steady going forward. So the market could build on recent gains, says Pramod Gubbi, VP-Sales, Ambit Capital said.


However, in the short term, it may consolidate 50-100 points around current levels. “There could be some reallocations coming into India given that it tends to benefit in a commodity down cycles,” he said in an interview to CNBC-TV18.


In line with the widely-held view, Gubbi expects corporate earnings to improve to low double digit growth from FY14 onwards. “For earnings, we think FY13 should be the bottom. Generally, the earnings season has been quite positive, surprising the market. That should continue going forward,” he said.


On sectors, Ambit remains underweight on IT stocks barring HCL Tech, which seems attractive from valuations perspective and has growth drivers. 


“Looking at the consensus estimates we feel that expectations have run far a bit ahead of reality. Yes there has been a recovery in the US market, but we don’t see it translating into IT spends growth,” he added.


According to broking firm, auto shares will perform better in FY14


Below is the verbatim transcript of his interview on CNBC-TV18


Q: Super brunt for the index. What’s the sense you are getting in terms of whether there is more momentum on the way up or most of it has played out?


A: The recent rally clearly is driven by significant foreign inflows, which is close to a billion dollars in the month so far. In the near term, there could be some consolidation in the range of 50-100 points from this point on. In the medium term, we remain positive. We think the market could go quite higher from here.


Q: Money support at least from the foreign funds has been fantastic. What are you picking up in terms of whether that has been the central force pushing the market or are people turning more positive or optimistic on the macro set up?


A: It’s a mix of both. Liquidity has been quite benign globally. We have seen the developed markets rallying that are US and Japan, largely driven by liquidity. However, the other point too is also equally valid; the fact that the commodities have corrected in the recent past.


Since, India is a net importer of commodities; it has direct implications on the current account deficit (CAD), which is the biggest problem our economy is facing. So, as a result of that, there could be some reallocations coming into India given that you tend to benefit in a commodity down cycles.


Also read: Pledged shares value in Q4 steady; 10 pointers: Edelweiss


Q: You interact with a lot of your FII clients. What’s the sense you are getting in terms of where the next leg of money could be put in? Is there a risk of money flowing into markets like US and Japan because they continue to outperform?


A: I would think so due to various factors. Particularly liquidity should remain benign going forward. We have also just seen the Japanese central bank joining the party, as far as quantitative easing and pumping in more money is concerned. So, lot of that money needs to either be deployed in the real economy or even if it just finds its way in asset markets, the asset markets should be quite buoyant going forward. The same applies to equities as well.


The only risk that we see is either on the political front or if some of the liquidity finds its way into the commodities market. The risk is particularly for countries like India, which are importers of commodities and that could be sort of a headwind.


As long as we see the sort of movement in commodities so far, equity markets in general and particularly emerging market equities should continue to do well.


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Q: What have you made of the earnings season so far this quarter? Are there enough signs of troughing out of earnings?


A: FY13 earnings should be the bottom, FY14 onwards we expect earnings to pick up albeit quite modestly. Earnings perhaps could likely be around the low double digit sort of growth rates. In fact this earnings season has given some indication barring a few exceptions within sector and within sectors, also certain stocks. Generally, the earnings season has positively surprised the market and that should continue going forward.


Q: You haven’t been very positive on IT as a space. Of course the numbers didn’t look great but there is some incremental buying coming into that sector. How would you approach it now?


A: We recommend an underweight on IT. We think expectations have run a bit ahead although the recent correction means that there is moderation following the Q4 results, particularly in names like TCS, Infosys and Wipro.


We did see some correction but looking at consensus estimates, it looks like expectations were far ahead of reality. Of course, there is a recovery in the developed markets, particularly in the US, which is the largest market for Indian IT service providers. However, we don’t see that sort of recovery translating into IT spends growth, especially the sort of growth that consensus seems to be reflecting.


So, we still remain underweight on IT barring a name like HCL Tech which is still attractive from a valuation stand point and has decent growth drivers. We would be underweight on all other largecap names.


Q: What is your view on rate sensitive sectors like banks because the track record has been good for private banks but PSU banks have started to see some horror numbers this quarter around?


A: We have a slightly different view on banks although it falls under the rate sensitive bucket. We have issues around asset quality, although some modest recovery in the economy should sort of abate those concerns. But given the broader issue around the various allegations, around money laundering; could put some pressure on the fee income of particularly the private sector banks, especially, if the RBI were to take a stricter action against the banks that have been mentioned in the reports.


Therefore, fee income and asset quality together would mean that the bank’s earnings are unlikely to continue in the same range. So, barring banks, most of the interest rate sensitive sectors look attractive to us, particularly autos.


We think there is a fair bit to go for autos. FY13 clearly was quite a bad year for autos in general across two wheelers, four wheelers and commercial vehicles. FY14 should definitely be much better than that and that should drive topline growth and margins for that sector, which is operationally leveraged.


We are also positive on the power and infra sectors, the power sector particularly driven by policy reforms. We should see some further activity in terms of capital raising there and some project activity should pick up and that would feed into the construction area where guys like Larsen and Toubro should definitely benefit.


There are lots of other names in that sector that are still sort of struggling to fix up the balance sheets. So, L&T continues to garner a larger share of the order flow, which should continue for the next year as well.


Q: When we spoke last time, Ambit was putting out a list of fairly ambitious midcap ideas to their clients. Have you come with a best bets kind of list with the earnings season so far?


A: Clearly, we are betting on the cyclicals. We think that the economy has sort of bottomed out. Moreover, with the sort of money coming in, we have already seen the beginning of the capital raising activity with Den Networks and DLF raising large sums of money. If more money comes into the real economy then a lot of cyclical sectors, capital intensive sectors should drive this rally.


We are betting on sectors such as auto, consumer discretionary in general, but auto in particular. Also sectors like oil and gas, infrastructure particularly the higher quality names in these sectors, power utilities given the sort of attention from the government are the three-four sectors which should drive the rally.


Q: We were talking about the banks earlier. What did you take away from the Reserve Bank of India’s monetary policy statement and what do you think the market should take away from it more importantly over the course of the next few months?


A: I think central bank action should continue to be on the dovish side although the commentary was a bit hawkish. Given the commodity price movement, inflation should come more within control. Following that, hopefully in the next 30 days, we will get a sense of how the monsoons are going to pan out. If we have a regular monsoon season, the food price inflation should also be under control.


So, inflation should necessarily go out of the central bank’s concern. The focus will be on fiscal consolidation where the government has made a beginning. Going by the sort of spending that we have seen so far from the government, I think they are on track to correct the fiscal deficit situation. Both these factors inflation and fiscal deficit should give central bank the comfort to continue its rate cut cycle which should be positive for the equity markets.


Q: Do you think the markets could touch a new high this year? What is the range that you would be working with for the Nifty in 2013?


A: For the Nifty, our range would be somewhere closer to 6400-6700 for the end of this year. It could even touch 6900 in a bull case, if there is a material improvement in the CAD front. So we definitely think markets could be making new highs in 2013.



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First Published on May 9, 2013 10:27 am
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