Mkt may see 15% gain in 1-year, but be in defensives: Ambit

Global markets have been subdued over the last few sessions. In an interview to CNBC-TV18, Andrew Holland, Ambit Capital says the new leadership in China would lead to positive noises about growth, going forward, for the country. "I think if that is the case then that would give the backdrop for a very strong global rally as the economic outlook expectations going into 2013 would start to improve," he adds.

According to him, India may see more flows going into 2013. “If you take more fundamental view, one year, we are saying that the market will probably follow earnings growth. We are expecting 10-15 percent earnings growth next year. So, we could see the market some 15 percent higher this time sheer on pure fundamentals,” he adds.

However, he says, there is no need to jump from your defensive stocks straight into high beta just at the moment.

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Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Reema Tendulkar.

Q: November has been extremely rangebound series. Everyone is hoping that December will break that jinx. What do you expect to see at the year-end, a bit of a rally or more of this rangebound grinding?

A: I hope it is not rangebound trading. We have been hoping that the new leadership in China, which recently took place, would lead to more positive noises about growth, going forward, the country. I think if that is the case then that would give the backdrop for a very strong global rally as the economic outlook expectations going into 2013 would start to improve.

Everyone wants to try and get into that rally at the year-end. We would be looking for that. Otherwise, obviously any resolution in US fiscal cliff will give you a relief rally. But I do not think that we will walk into 2013 too confident about the economic backdrop of the Europe and the US, without some positive words from China. That is what we are banking on. We think that will move global markets and India as well.

Q: With respect to India, everyone is also watching out for the progress on the winter session of Parliament. What is your expectation of how that is likely to pan out? Where is the market likely to be at the end of it?

A: That is a tough call. Hopefully, everyone would see some sense and push through the reforms needed to help India grow. I do not think, overnight, this is going to be great for GDP. But two-three years down the road, I think it will be. So, I am hopeful that they will be pushed through.

I am hopeful that the government has enough numbers to get it pushed through. If not then we go back to square one. The market will not like that. That would put pressure on the currency, fiscal deficit, current account deficit and obviously the rating agencies. So, the downside is what we all know. We are going in with low expectations, knowing that it is going to be difficult transition to get some of these reforms through, but we are hopeful.

Q: Do you think it could be a deal breaker in terms of determining the flows? Flows have been fairly sanguine. The market has been pulling money, maybe in lesser or higher degree, but money has not been a problem this year.

A: No, it hasn’t. The problems, which we see and talk about on a day-to-day basis, it is not as though other countries and other emerging markets or BRIC countries haven’t had their own problems as well. So, India has been seen as the cleanest shirt in the laundry basket for sometime. I think that will continue.

If China starts to talk more growth, because of the valuations there, you could see more money going into China initially. But in the backdrop of that and global growth, it would be good for India too. So, I would expect to see more flows going into 2013 as well.

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Q: How are you approaching the market? Is it a buy-on-dips approach or do you think this is sort of the twilight zone where there is not going to be too much movement, once the big trigger is out of the way, the market will start breaking out or breaking down conversely?

A: If you take more fundamental view, one year, we are saying that the market will probably follow earnings growth. We are expecting 10-15 percent earnings growth next year. So, we could see the market some 15 percent higher this time sheer on pure fundamentals. Obviously as interest rates come down, earnings should start to improve. So, on a fundamental basis, we still feel this could value.

We haven’t shifted into high beta, high debt, and questionable management companies yet. I do not think there is any need to jump from your defensive stocks straight into high beta just at the moment.

Q: For a market like India, what do you think will be the more important global trigger going into next year? What happens on the fiscal cliff situation or any potential breakdown in the Euro zone?

A: I think those two will continue to make the headlines, but, to be sure, it is going to be China. China has got a new leadership. That is once in a decade change. The country seems to have bottomed out from expectations or the more dire expectations people are expecting. So, I think China is your big catalyst for global growth. That will continue for sometimes. So, if China says, we are going to try and push ahead with growth, I think that is great for the world. I think that is great for the markets.

Q: The government has finally kicked off the divestment calendar for FY13. It has done it with Hindustan Copper and atleast on Hindustan Copper there were no FIIs which participated. It was largely taken up by government companies like an LIC and we understand even a couple of PSU banks as well. What do you think is going to be the FII response to the companies which have been outlined by the government for divestment, the likes of an NTPC, NMDC etc?

A: Depending on the pricing and valuations, I am sure that they will look at this and its holdings very closely. However, it depends on the valuations. So it is difficult to say what the government’s pricing would be in. I think couple of times in the past year divestments were kind of pushed up.

If that does not happen and the valuations look reasonable in these companies, then FII participation should be reasonable. However, I look at it slightly differently. It is not important whether there is FII participation, you have to see if the government is raising money and at the end of it, how is it raising the money. If it is going for all government companies, then it is okay. It is not the best solution on a long-term basis, but in the short-term, it is best to see the finances of the government which is solely needed for sure.

Q: It seems like there is potential interest both in terms of strategic investors and PEs. Have you become brave enough to get into aviation or not yet?

A: No, not at all. I wish I was. We have heard about these rumours of Ethiad some weeks back, but we still think it is three-four months out. I will be surprised if they jumped in so quickly, given the state of the industry. The government is still trying to push through reform measures.

I do not feel like chasing this. I can always wait and see what the deal is and then look at it on a longer-term basis, but the airline industry in India is marred with problems. I do not think I need to chase the speculation at the moment. I wish I had, but not at this price.

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Q: Would you do it very differently in terms of a portfolio approach for next year? Are you guys switching in and out of sectors a lot because there is a whole bunch of new faces that have come in - media for one, telecom has moved after a long time?

A: No, we have not made that switch yet. We are still keeping with the defensives; the FMCGs, pharmaceuticals, midcap IT. We have been nibbling away at some of the interest rate sensitives, and sectors like media is something that we are interested in. But I am not overly convinced yet to be making that big move and I can do it slowly but surely, over the next few months if I need to.

When the market rallied so strongly in September, there was that temptation to kind of move to high beta infrastructure, beaten down stocks but some of it has paid off and some of it really has not. I would rather be in the camp, where I can see earnings growth going up 10-15 percent, the market going up around the same level. So this time next year, you will see the Nifty near to 6500 and that will be led by the continuation of the sectors, which we have seen in the early part of the year and then some of the more interest rate sensitives. So we are looking at the banking sector and have been nibbling away there but we have not gone yet to the PSU banks. B

For sure, if you do have that rally in December which I talked about, with China talking about growth, then the PSU banks will be the big outperformers. I just want to say that I am quite happy to kind of rent those stocks and not own them at the moment. The fundamental problems of some of those banking companies have not gone away and will not go away for sometime.

So stick to the quality at the moment and look at some newer themes. I like the Starbucks theme; it is a great long-term story. We continue to look at new areas. Retail obviously, if things get pass-through, would be something which will explode again and the retail revolution will continue. But how do you play? It is still quite difficult apart for a few names. Maybe we have to look at the suppliers, or maybe we have to look at the infrastructure part of from farm to fork in terms of the distribution, warehousing and logistics companies. Those are the new companies which you could look at going forward. So, there will all be new themes. Media is something we like as well.

Q: When do you think the next rate cut from the Reserve Bank of India (RBI) will be for the Indian markets? How much of a trigger will it be just in case if the RBI goes ahead say with a 25 bps repo rate cut, perhaps in January?

A: We are all expecting it, so I do not think we are going to be surprised. It is going to be what the RBI say and how perhaps they are going to talk about walking down that lonely road that Chidambaram is walking by himself, in terms of growth and maybe they will join him on that road. That is what we are all looking for.

The expectations are that interest rates will continue to fall throughout 2013 that is for sure because of the way growth is slowing. At the moment, for any country in the world, it is how you could have achieved growth and I think that is what troubling the Indian markets at the moment, because there is nothing moving.

The RBI has been stubborn in terms of their stance in interest rates and inflation. Maybe they have to kind of walk the growth path with Chidambaram now, to get India Inc. feeling positive, because if it is not positive, we are going nowhere.

Q: There seems to be a degree of comfort going into next year about the downside risk for this market. Everyone is setting out targets for the year-end and no one really expects to see a sharp correction. What do you think is the downside risk present going into next year?

A: The downside risk would be if we go into the New Year with no resolution in terms of reform measures, nothing gets implemented. The fiscal deficit continues to worsen because the currency is weakening because of disappointment with what is happening in parliament. And India Inc. in terms of the corporate leaders, continue to shy away from investments in India. That would mean that the earnings growth which we were hoping for again might be kind of brought down.

In that scenario, the flows to India that we are seeing might be directed somewhere else, where we are seeing better growth prospects. I think that is the risk for India. But do I see a big fall from here? I think 5-10 percent would be a downside from here, because I think the valuations in India are not so overvalued at the moment that it would cause too much pressure.

Q: The currency market seems to be reading things differently from the equity market. While we have been fairly flat as an equity market there has been a lot of pressure on the currencies.

A: Yes, and that is down to the disappointment of what we are seeing at the moment in terms of the reform measures. Since they were announced there is a lot of euphoria and we saw the currency strengthen on the back of that but there has been no implementation. Obviously, some of the bills have to be passed and implemented thereafter. There has been a lot of talk, a lot of pushing up of market expectations but very little change on the ground. So, the currency market is going back to where it was and saying, nothing has really changed here and we do not see the likelihood of that or there is a bigger risk of that happening and if that continues then the rating agencies will come in and downgrade India to junk status.

Q: If we do see a bit of a rally perhaps on the back of China as you were indicating or maybe in the early part of next year, is it likely to be driven by defensives or then will you take a call? Whenever you get a sense that the rally begins to come in would you make the tactical change about shifting to high beta?

A: If you have that rally, then as I said before you kind of rent the stock, you do not really own it because those companies still have their own problems. Whether it is balance sheet problems, whether it is management in terms of corporate governance problem or whether it is just growth in their own sector problem. So, I do not think you can just say, buy high beta and live with all of the companies. You have to do your homework a little bit more in terms of, you can buy a basket of high beta but there is only two or three that you would really want to own over a longer term basis. I think you can play that out throughout 2013.

It would be nice to buy some of these companies at the kind of lows and hold them over the next two years, as they become multibaggers. But to be honest, even if I missed the 20-30 percent rally that you might get in them and then buy them and own them on a 1-2 year basis thereafter, and they do rise 2-3 times, I am not going to be disappointed. So, a little bit risk averse in terms of just jumping into high beta, just for a market rally without looking at the fundamentals of the company as well.