May have seen peak of risk on trade for now: Jaipuria

Even though not much was expected from Infosys' fourth quarter performance, the IT major managed to shock the street with its poor guidance for FY13.  Speaking to CNBC-TV18, Jyotivardhan Jaipuria, head of research, BofA Merrill Lynch said that the numbers were worse than most bearish estimates. "We have been mildly negative on the software space," he reiterated.

India's second largest software services provider reported a 27% year-on-year growth in net profit for the fourth quarter, but forecasted much lower-than-expected US dollar revenue growth for FY13, warning the year remained challenging due to slower growth in the global economy.
According to Jaipuria the market is going to see a lot more stock specific moves rather than broad sectoral trends. He says all eyes will be on the Reserve Bank of India and whether the central bank finally decides to cut rates or not. "We expect big slippage in fiscal, which in turn will constrain the RBI easing," he said.
The RBI is likely to cut its repo rate for the first time in three years in an attempt to lift sagging economic growth, even as high oil and food prices remain a challenge to managing inflation, a Reuters poll showed. The central bank has held its key interest rate steady since its policy review in mid-December, after raising it 13 times from March 2010 to tame high inflation, most recently in October. Its last rate cut was in April 2009.
As far as the market goes, Jaipuria feels, it may have seen the peak of risk on trade for the moment. "We'll probably see a downgrade of 2-3% in earnings…may be even 4%," he said adding, "our year-end target is at 19,000 for the Sensex." Catch the full interview transcript on the next page.
_PAGEBREAK_ Below is an edited transcript of Jyotivardhan Jaipuria's exclusive interview on CNBC-TV18. Also watch the attached video.  Q: It is a 10% down drift on Infosys. Are you disappointed and would you review your stance on the sector and the stock now?
A: We have not been very positive on the software sector results for this quarter. Our expectations were that this would be a quarter of weak results for software. So to that extent it has generally been in line with our expectations. On the margins probably results have been not as good as we were or they have been worse than what we were expecting also. Q: Would you extend what you have seen and heard today in terms of how you are approaching the sector and caution for the sector? Do you think people are getting a lot more specific about which one they want to pick?
A: I would think not just for software but in lot of sectors now we are going to see more stock specific moves rather than a broad sector trend. There is of course something in the sector which may hold up. One of the key things which may help them over the next few months is if the rupee starts to depreciate again because in the first quarter of this year we had a period of rupee appreciation which further hurt the performance. So that is one thing which could turn out to be positive but other wise for the market the key thing is the RBI policy. Will RBI really cut rates and oblige the market because that is where the big focus is. If RBI does cut rates, I think it is the rate sensitive which will actually do well rather than the other sectors. Q: You have been amongst the most cautious on the street about what kind of earnings one should be modeling for FY13. Your last note spoke about the fact that there will be more downgrades as we move down the year. Does this make you more confident that such downgrades will happen and the street has to bring down its expectations for earnings for sensex for FY13?
A: Yes our stand has been that FY13 is still very optimistic. 8 months ago we took the stand that for FY12 also earnings were very optimistic. Top down we put a sensex EPS number of 1100 when the street was at 1200 for FY12 earnings and now for FY11 I think we will get to our original number. It is the same thing for FY13. When we start any fiscal year and these are typically very optimistic and as we move into the fiscal year numbers tend to get toned down. We’ll probably see that toning happening by the end of this result season itself and we’ll probably see a downgrade of 2-3% in earnings, may be even 4%. Q: For the rest of the earning season which ones would you expect to disappoint now or which sectors because we have started off with a big disappointment from IT. Do you expect any other sectors to actually come in with difficult ones for the market?
A: I would think the whole infrastructure, the capital goods space even if they don’t disappoint on the current expectations, the order inflows are going to disappoint. So people are going to be very cautious on the outlook for lot of these stocks going forward. So that is one big sector where we probably will see disappointments. The banking will be a mixed bag where we will have some numbers which are not going to be as good. The focus here has to be on the NPL slippages and how accurately people are discounting some of the companies which are not really going to do well, where the NPLs probably should be recognized but maybe the banks are not recognizing. So those are two big sectors to watch out for. I think some of the global commodities also are not really going to do particularly well, so we could see some earnings down waves there. Q: What are you picking up from the Merrill Lynch fund manager survey in terms of what is happening with flows? How people are feeling about India? Any change in portfolio positioning there?
A: There was a bit of risk on. Now what some of our proprietary indicators are showing that probably we are reaching a peak of the risk on trade. So maybe the next quarter will see a bit of risk off coming through. Second is we are seeing lot of concerns on the China growth, so people are very concerned that China will slow down and what impact that will have on the economy. Lastly on India there has been not too much of excitement, part of it has to do with the whole GAAR issue. If we see the market per se, what we have seen is volumes have dried up, volumes have come down and people are still waiting and watching if we get a final clarification on GAAR and how the taxation structure will work out. So that is something in my guess is upto the time when the Budget is passed and then the guidelines are issued on the whole GAAR issue. We will probably see markets being in a very low volume area. Q: I read in one of your reports that you suggested that even if the RBI cut rates the markets could drift lower. How much of a downside possibility do you see and why the contention that even a rate cut might not lead to any great upsides?
A: I guess the whole market is holding up on just one thing which is RBI will cut rates. So now every time we get bad news – bad news is treated as good news because we will get a rate cut from RBI. But what we have to remember is if growth really slows down then it is going to start hurting your EPS growth and once that EPS growth gets hurt there is only so much that the market can rally. The other is how sharply RBI cuts rates because ultimately now the April rate cut is become a consensus for everyone but what is probably also happening is that people are toning down their expectations over rate cuts through the course of the year. Everyone was much more optimistic on a series of rate cuts 2-3 months ago. People are now coming and getting a bit more cautious that RBI has to cut rates because the fiscal is not really going to be get controlled unless we really see a big drop in global oil prices.  In which case things maybe good that fiscal come somewhere within the target the Finance Minister has put. But otherwise we have a big slippage coming on the fiscal deficit which constrains RBIs ability to cut rates.
Second is inflation is much lower than what it was but there is that whole element of some administrative prices including oil which needs to be increased. So to that extent RBI is also aware of it that at some point inflation could jump up whenever the government acts on these administered prices. So I think even if we get a rate cut we will probably get some bit of caution that their ability to cut further rates will depend on government policies, will depend on how fast the government can move on the fisc and to that extent I think we probably have a bit of positive sentiment on the rate cut. A lot of it is now starting to get discounted in the market. Q: You keep an eye out on politics as well. How much of a policy discount this market is struggling under and how much of a political risk as well you think for what has been happening in terms of developments?
A: I would think the key thing is now we are at a situation where probably the governments’ ability to really cut down the fiscal deficit appears to be limited. Even if they want to hike prices what they are facing is the political environment is not conducive enough for those hikes to go through. So whether it is the allies, whether it’s the opposition the pressure becomes too much on them and they end up not being able to go through with some of the decisions. I think from the government point of view probably what they can focus on is removing some of the bottlenecks which are hindering implementation of large projects be it environment, be it allocation of natural resources. If they can get that moving, they get some of these big infrastructure projects moving and hopefully that investment demand comes back into the economy because today the economy is just moving along only on consumption and there is only so much you can go with this consumption growth. So somewhere the government needs to just focus on getting the investment cycle back on track. If they can do that then maybe market will start ignoring a lot of the other noise which keeps happening in politics. Q: So what kind of index levels do you have in mind in the correction that you are alluding to and what kind of a broad market range do you see for the next 3-6months?
A: We still are very optimistic on the yearend target.  We have a yearend target of 19000 which is essentially linked to things becoming bad and RBI being forced to really cut rates but over the short term we think market could drift lower. We could go back, we were at 15000 late into last year and that is the sort of thing where the market will probably bottom out somewhere around that level. So maybe that gives you a broad range of where we think the markets could really go into. Q: Just to go back to earnings, are you in the camp as well that believes that this quarter where that graph is being created for earnings. Do you think even going into the next year we have got a difficult task in terms of earnings performance?
A: There are two things on earnings. Last year what you saw was earnings getting downgraded very massively because unless you are very optimistic earnings had to get cut every quarter after quarter and it led to major earnings disappointments. So now relative to what happen last year, this year the cut in earnings is going to be much lesser than what we saw last year. At the same time I am relatively more pessimistic than the street since there are lots of people who believe that we are probably at the bottom, a rate cut will be enough to start leading to earnings upgrade. I think it is not going to enough. I think we will still see earnings downgrade but which probably are lesser than what we saw for the most of last year. We probably will end the year with maybe 10-12% earnings growth.