Market will correct more due to weak data: Amit Dalal

The three headwinds affecting the market are global conditions, economic data and currency movements, says Amit Dalal of Tata Investment.

Talking to CNBC-TV18, he says that global negatives like the Bernanke effect have already been factored in to some extent, and the damage to the rupee is done for the time being.

According to him, the main factor of concern is economic data, which is the one reason why the market will correct downwards in the months to come.

Below is the edited transcript of his interview with CNBC-TV18

Q: Today, we are seeing some respite for the market with a 0.5 percent pullback. In general, how are you feeling at this point? Do you think this market is sort of just paving the path to head lower from here on? If yes, then what are the markers that you would watch for now on the downside?

A: Let’s look at this market in context of three legs or three headwinds that are affecting it. One is of course the global scenario, what happens in terms of allocation towards emerging markets and the fall which has taken place in the emerging market valuations. Second is in terms of the economic data and the industrial slowdown that’s taking place in India. The third is the pressure on our currency.

Where global markets are concerned, I think whatever negative allocations had to take place, have already been factored in to some extent. There will be perhaps some more selling but to a large extent, whatever Bernanke effect had to happen has happened in the last week or so.

Where our data is concerned, unfortunately that’s getting weaker and weaker. Whatever we talk to industry and mean small to middle sector industries, there is considerable slowdown. So, the whole premise of this rally which took place in April and May was that the trough of our slowdown was behind us in the quarter of January to March and here on we will see perhaps a better earnings growth.

Almost all analysts had forecasted for 2013-14, an earnings growth of 12-13 percent. The lowest I had read in March-April was 11 percent for the year which now has been brought down to single digits by most analysts. I fear the first and the second quarter numbers even though we have had a very good rainfall will be quite disappointing.

So that is going to be the biggest reason for this particular fall in the market to continue for a while. Where the currency is concerned, as much as people are very bearish in the rupee, you heard 60-62 and such forecasts in the last one week, I think that the damage is done for the time being and there are two good reasons for that.

One is we are going to have an inflow of foreign institutional investors (FII) capital or foreign direct investment (FDI) capital coming at the end of this month from Hindustan Unilever (HUL). We have oil prices coming down. Even prices have come down and government having put in considerable gold restrictions so the pressure on the currency in the next month may not be as much as what we saw in the month of May and June.

That will bring some respite to the markets but I think the economic data is the one reason why this market has only one way to go and that’s correct downwards in the months to come.

Q: Considering your optimism, what would your view be on the broader markets and the declines that we are seeing in terms of stock-specific counters in the past couple of days - the likes of IVRCL, Gitanjali Gems? What would your call be on what’s happening and how do you extrapolate in terms of a trend for the markets as a whole?

A: I think I did not perhaps convey my message. I was not optimistic. I am as such not very optimistic. I think the markets will correct further. I am saying that this respite may continue for a while but the economic and industrial data will bring to bear even perhaps more pessimism in time to come.

With regards to these second tier stocks, you have named all companies which have question marks attached to corporate governance, excess debt on its balance sheet, valuation concerns at every point in its history. I don’t think this is a market which allows you to put your hand into these stocks.

You have many stocks at 52-week lows, at least on Monday they were and you do not have participation from the individuals or the retail market, you have very low capital available with mutual fund industry in India.

These are not the kind of stocks that one should perhaps indulge in any kind of game throwing towards your activities in the stock markets.

Q: The next trigger for the market is the earnings season. What is the sense that you are getting this time around? The last one was not spectacular by any means. Are you getting a sense that there could be incremental weakness for many of the companies this time around as well?

A: Year on year, I am not very sure but 6 percent revenue growth that we saw in March, one thought that perhaps that was the lowest that one would see. I am not sure what it will be but when I talk to people in mid-tier industry, again I say I am not talking about the large industries, I don’t sense any respite that has happened.

On the contrary, the last month has been very taxing in their fortunes. They are really seeing pressure on demand and sales growth.

Q: What would your opinion be on all of these gold related stocks? We are seeing a lot of declines coming into the likes of Mannapuram and the related counters like we have been talking about. How worried would you be about the non-bank financial companies (NBFC) space in particular now? Even an M&M Financial which did mention that they are not going to apply for the banking license space. In general, what would your view be on couple of these banking NBFCs?

A: I will break that up into two. One is related to gold. Gold lending which has taken place, how aggressively it has been done by any NBFC is something that is dependent on each NBFC. But definitely the margin which was available to the NBFC in terms of safety has gone down.

I was always worried about when my wife talks about jewellery. She would never think about melting the jewellery of gold that she has and making something new.

She always says there is a huge loss when that happens. I don’t know how banks can ever get to realising gold after melting thousands of cases of jewellery if you have defaults.

So there is, I believe, an operational cost to this whole lending of gold which is not factored in by banks. There remains a concern irrespective of which bank it is. Depending on the quality of the borrowers that they have given to, it perhaps is different from one bank to the other.

The second question you raised regarding banking license and NBFC valuations and in this context we have talked about M&M Finance. I think the market has gone a little ahead of itself in giving valuations to NBFCs who may or may not apply for a banking license.

First and foremost, getting a license and then putting a bank in place is a huge humungous task. It is not something that you can overvalue a stock by Rs 50 a share, and that’s the kind of fall that has taken place in M&M because of its endeavour to move into banking.

They themselves explained that there are certain major issues related to the regulatory requirements for setting up a bank. Therefore, I would take a very long term view when I invest in a stock which is going to get a banking license.

I think the market has truly overplayed itself with this whole banking license.

Q: How much more pain would you see for public banks going forward in terms of asset quality and hence worsening fundamentals and worsening profitability in the coming quarters?

A: I think the large fall that has taken place in the last few days is more a sharp negative correlation to yields on the 10-year becoming adverse because the RBI did not give the relief that people wanted in terms of lower interest rates, more than concerns on the Corporate Debt Restructuring (CDR) front getting worse.

Where the marginal rate of change in increase of gross non-performing assets (NPA) or stressed assets; I think that is going to be much lower in 13-14 than it was in 12-13.

There will be some increase. I do not think we are going to have negative growth there, but definitely the rate of change on that number will be much lower.

Disparity in valuations will continue. People will be only in places of safety. People are not going to take a contrarian call right now. Dividend yield was the only reason why these stocks were holding on for sometime, but most of these stocks have become ex-dividend now, that is the PSU banks.

Q: Telecom has got quite a lot of newsflow in the last many weeks but incrementally would you be bullish?

A: Idea Cellular is definitely better positioned in terms of business. However, I am not very happy with the sector on the whole in terms of the capex that it has to do over the next three or four years. There is more and more investment required from this industry but if I had to remain invested I would continue to be invested in Idea.

Q: We have seen quite a crack in the midcap space in the last couple of days. Lot of fears about margin calls getting triggered, etc. Do you fear that that could continue where the midcap damage could be far more severe than the frontliners? Within the midcap itself which are the pockets that would make you most uncomfortable?

A: I am surprised that still there is enough margin funding taking place in the midcap space between the retail market to warrant a kind of a meltdown or a capitalisation because there has been such indifference by the retail market in investing for such a long period of time.

Where investing in any midcap stock is concerned, I think it is clear; you have to invest in clean balance sheets, in clean corporate governance at this point of time. So if there is excess debt or if there is more than even 0.4 debt-equity ratio, one should avoid the stocks. Ideally, look for MNC midcap stocks to invest.

Q: What your opinion with regard to this deal between Oil and Natural Gas Corporation (ONGC), Oil India as well as Videocon and the fact that Videocon will also be looking to apply for a banking license. Your call on this entire situation and bout of news.

A: It is a transaction which perhaps for long-term is good for Oil India and ONGC. In the short-term this valuation of Mozambique has been in the limelight for a very long time and therefore it is not a cheap investment you are making.

You are making a fully-valued investment with prospects of oil coming down and therefore the valuation is obviously vulnerable to any change in oil price adverse to the present valuation. In context of Videocon encashing, Videocon has substantial debt on its balance sheet.

So this should help them in that context. With them applying for a banking license, there is considerable number of people applying. I am not sure how that will work out.