5000 on Nifty possible if global cues worsen: Sampriti Cap

Over the last week, global equities have buckled under the pressure of weak economic cues. With problems re-emerging in the eurozone, the US economy still under pressure and Chinese GDP at a 3-year low, Sandeep Shah of Sampriti Capital believes a sell off below the 5000 level is possible.

"However, a 50 basis point surprise from the RBI and some positive developments with the Finance Bill can take us up to 5400 on the upside," he said. Shah also doesn't hold high hopes this earnings season. "A slowdown in topline growth in Q4 is evident, and it will be a negative quarter the Sensex in terms of profit," he said. He further adds that only FMCG and pharma are likely to come up with strong Q4 earnings. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: Do you think the market might pick up from here if a rate cut comes tomorrow or are we still on a downtrend here? A: I guess 25 basis points is obviously baked into the prices. I would agree that with the recent economic data, especially on the IIP numbers which has come out, the probability of 50 basis points increases, but 25 basis points still remains the base case scenario. I have been saying that the downside in the short term was 5000 to 5200 and we have gone below 5200 on three or four occasions and bounced back from there. But I have also been warning that if global cues deteriorate significantly then we could even see a sell off below 5000 and that case seems to be building up with the US economic data weakening, problems back again in euro zone. Of course the silver lining is that with a slowdown in China commodity prices can come off and that could perhaps be the savior if things get worse. Crude prices have also come off, but it’s just too little to be of any significance. If you broadly look at the quarterly results, it really looks like it’s only going to be FMCG and pharma which might be the sole saviors. I don’t think Infosys is the correct benchmark anymore for the IT industry, but obviously it’s an IT company and to the extent that things are worsening suggests that there is a mild deterioration and even TCS has said so. What one can expect is a significant slowdown in top line growth, and if you were to look at the Sensex and strip SBI off, you are again going to see another negative quarter in terms of profits. But the broad view remains that perhaps it’s still bottoming out, in the sense that we are not looking for significant earning downgrades from here. Even though margins are going to fall year on year, perhaps the worst margins are behind us. So yes some more short term downside possible, especially but that’s linked to how the global situation pans out. Q: So how are you approaching the market, are you selling it in anticipation of that 5000 move and what would be the capped upside now for the market? A: Post the passing of the Finance Bill, if the government finally does act and take support of the Samajwadi Party and push through some non controversial reform, and if the RBI were to cut interest rates by 50 bps and give a dovish outlook, then you could even go back again up to 5400. But at this stage the market is somewhere in between, it’s at a level where you could see a small bounce back. Chances are that we are again going to go below 5200 this morning but there is always a risk of a small bounce back and you do want to wait for the RBI action before you actually do anything. The portfolio stance right now remains the same, which is to stay invested in the consumption names, to add second tier names, to nibble on banks and autos. At lower levels, watch out for the industrials and see if there are individual stocks where the risks are priced in and where it still makes sense to invest in from a longer term perspective even if the environment doesn’t change. Q: How much of holding on to this range is dependent on what the RBI says tomorrow? For instance, assuming for a second that they don’t move on rates, how much does that impact the market in terms of price damage? A: I think that’s a low probability outcome, especially with the recent economic data on IIP and the downgrading of the January numbers, I think that’s a very low probability outcome. But if there is no interest rate cut, then without global cues we could see off below 5000. Right now my base case is that things do deteriorate globally and because of that we sell off below 5000, but if the RBI doesn’t cut interest rates and doesn’t give a dovish outlook, then we can sell off to 5000 just like that because clearly interest rates are beginning to pinch. We have also had a situation where the rupee is collapsing and for the first time since 2008 we have had a negative balance of payment situation. If you look at investment demand in the economy, we have had two consecutive quarters of negative investment. So interest rates are very key and crucial now. In the sense, it’s not like you are given 25 bps and the economy recovers, but if you don’t then the patient would have to be admitted in the ICU. I think that’s the scenario we are in. Read on for Sampriti Capital's view on Infosys post its results.. _PAGEBREAK_ Q: That’s what the market will start talking about tomorrow onwards if we do get a 25 bps. The market thinks that in the next three-four months we’ll get another 50 bps, but is it a sentiment thing or do you think it really makes a material difference? A: I fully agree with you that the first additional 50 bps is really sentiment. If you are paying 14-15% interest rate, 50 bps can't change your life. But it makes a huge difference to sentiment, whether its corporates or even the more aware consumers, because if you have a sense that interest rates are going to fall, then you are more willing to lock in to a variable interest rate. But if you think that interest rates are going to rise, you don’t feel good about the overall environment. So I agree with you that the initial 50 bps is going to be sentiment, it’s really when you hit that 100 bps that you start having a meaningful impact. At the same point of time, I would highlight that there are lot of projects which are on the fringe where a 50 bps change can alter something which gives you negative returns to something that gives you neutral returns which makes you change your outlook towards it. It doesn’t help you make that investment call, but it makes you closer to taking that buy call saying that yes perhaps we can go ahead with this and the primary impact is sentiment. I also think that if about a month back we were looking at say 50-100 bps kind of interest rate cut even, the probability of 75 bps interest rate cut actually increases now. So I agree with you it’s sentiment, but even if you look at inflation 70-80% of inflation is all expectations even if there is a lot of supply side component it’s really what people expect and the whole psychology which gets impacted with cuts. Q: What did you read into Infosys’ numbers, the guidance and what are you doing with the sector now? What would you prefer to buy over Infosys? A: It was an absolute unmitigated disaster. I think everybody in the market is saying that you can't have such a rigid margin focus. Even if you are focusing on margins, you have got to focus on margins over the longer term and not just focus on margins over the shorter term. It’s good if you can ramp up your consulting business but it’s still a long way from here. The strategy that for example TCS has shown on being willing to compromise on margins in the short term so that you can build volumes and hopefully deliver margins over the medium to longer term has proved to be far more sensible. Now I would hope that Infosys can do better than that because with an 8-10% growth it’s not going to be on the radar screen of a lot of investors, it’s not something one is interested in. India is a country where the nominal GDP growth is between 12-15%. Even in a bad year we are close to 12%. So in that environment, a company which is growing at 10% and trading at 15 PE is not something that would excite you, even if you have a high return on equity and management of the highest integrity. So I think they have got to show more dynamism, they have got to show more vision, they have got to say that they are concerned with margins, concerned with profitable growth but it’s really over the long term. In the short term you may have to make a few compromises. Something is obviously not working for Infosys. NASCOM said that they are not yet looking to revise their guidance for the sector growth. So if one were to take that at face value, that would suggest that Infosys is saying that they are going to grow below industry growth and that means that they are not interested in Infosys. Obviously there will be some dampening on the TCS outlook as well, they have said that they are seeing some delays, but if you have to stay invested in this sector I think its got to be TCS and perhaps HCL Tech. Also look to see if Wipro’s new management can actually deliver. The question that a lot of Infosys shareholders might be asking is whether the strategy of having Infosys founders coming in for a couple of years one after the other is the best for the company from a longer term perspective. May the best man in Infosys management be the CEO and it doesn’t matter if he is a founder or not a founder. So there are a lot of tough questions that investors are asking about Infosys. At this stage, my base case scenario would be that Infosys, I am not going to build in anything more than 11%, and that doesn’t qualify to be investment worthy at all. So there could be more downside for the Infosys stock even from current levels.