CRISIL Research sees Nifty at 5400-5500 by March 2013

Tarun Bhatia, Senior Director, Capital Markets at CRISIL Research expects global growth along with India's GDP to pick up in the second half of the current fiscal year.

In a chat with moneycontrol.com, Bhatia says, he expects the markets to trade at 13x of FY14 earnings by the end of the current financial year. "We believe that Nifty should be around 5,400-5,500 by March 2013," he says.

He says policy action, fiscal consolidation, currency movement and global commodity prices are key monitorable given the uncertain environment.

Here's the edited transcript of Bhatia exclusive interview with moneycontrol.com.

Q: On an absolute and relative basis, how do you read the current market valuation?

A: Indian market, as measured by S&P CNX Nifty, is currently trading at 12x and 11.4x on FY13 and FY14 earnings. Over the last 10 years, the median one year forward multiple has been 15.8x. Hence, we are clearly trading below the historical levels. The current market valuation factors in global risk with respect to the uncertainty in Europe as well India specific macro risks – lack of policy action, low growth, weak rupee and high inflation.

However, we expect global growth and India's GDP to recover in the second half of FY 12-13 supported by some actions by the government on the policy front and reduction in interest rate. We expect markets to trade at 13x of FY14 earnings by the end of the current financial year and we believe that NIFTY should be around 5,400-5,500 by March 2013. Policy action, fiscal consolidation, currency movement and global commodity prices are key monitorable given the uncertain environment.

Q: What is your assessment of corporate earnings for the recently concluded quarter?

A: The earning has been better compared to our expectation. Earnings growth was ~7% YoY for NIFTY. The earnings are largely driven by higher profits from few companies like SBI, Tata Motors and ONGC.

Q: What is your outlook on corporate earnings for the next couple of quarters?

A: We expect corporate earnings to remain  under some pressure for the next two quarters at least. While we expect the momentum in growth to come back in the second half of FY13 driven by the factors mentioned earlier, the pace of growth will be slower than what we had projected earlier. We have recently revised our GDP growth estimated for FY12-13 to 6.5% from 7% earlier. We expect overall operating margins to remain flat in the Q1 FY 13 versus Q4 FY 12 . We are projecting improvement in margins for export oriented sectors like IT and Textiles driven by reduction in commodity prices and currency depreciation in. We are expecting decline in operating margins in sectors like construction, power, real estate and sugar

Q: What do you see as the key triggers for a decisive market move, either ways?

A: We believe policy action by the government is the most important thing to really create confidence among investors. Apart from that, sharp interest rate cut, strengthening of rupee and stability in Europe would be the key positive triggers. On the negative side, continued higher inflation, fiscal slippages, bad monsoon and problems in Europe getting worse are the key triggers.

Q: What is your outlook on interest rates? Do you subscribe to the widely held view that cutting interest rates will revive economic growth?

A: While we expect interest rates to come down, the pace will not be sharp. We are expecting another 50 bps cut in FY13. However, with the high expected fiscal deficit, the government borrowings will be high and keep the interest rates high. We expect the 10 year G-Sec to be in the range of 8-8.2% by March 2012. Cut in interest rate will represent the direction and approach that the central bank is adopting. It will partially reduce the interest burden on the corporate but cannot really revive growth on itself.

Q: What is your outlook on the rupee? Do you think the government and RBI will be able to check the slide?

A: Rupee depreciation has been largely due to increasing current account deficit on account of weak exports and heightened global risk. We expect the current risk in the global environment to subside over the next 5-6 month which should lead to better dollar flows.  We expect rupee to move back to 50 level to a USD by year end.

Q: Which are the sectors where you see opportunities and which industries are you bearish on?

A: We expect consumer stocks (non-discretionary and good brand plays), FMCG, pharma and banking to do well over the next 12 months. Companies in real estate, infrastructure and metal could under perform.