Positive on mkt, earnings upgrade seen in Q3: Quantum Sec

Well, all is not that bad with the Indian market. Though pestered with political logjam and low economic growth, some experts feel that the market is poised for some upmove. Sanjay Dutt of Quantum Securities is positive on the market reasoning that downside in limited now.

On a very optimistic note, he continues that September would be a better month as the market is adequately factoring in earnings downside currently. Dutt also stresses that there could be earnings upgrade starting from December quarter onwards.
"You need to really take a call where I want to be. Do I want to be in places where the probability of a correction is 25-30% or I want to be in a place where I will see pain for another 2-3 months but the upside is huge when it does start to happen? That is exactly what all of us have to game and that is exactly what the risk reward equation is all about when you are in equity markets," he says in an interview to CNBC-TV18. 
As an investment strategy, Dutt continues to avoid PSUs including the oil market companies. Dont miss: Market may correct if govt fails to take action says Dalton Below is the edited transcript of his interview. Q: August wasn’t a great month for all midcaps particularly though the index did not do too badly. Do you see September being a bit more constructive?
A: Although the technical picture looks lousy at this point of time after the top being made and the 5400 odd levels, I think the market is in a constructive mode. We have seen a decent pullback from the lows of 5050, going up to 5440 levels. This pullback was quite expected.
Yes, in August, the midcaps did very badly, the expected sectors didn’t do well even in the frontline counters. But most of us are now obsessed with the rear-view outlook, and correctively so, because there is so much of negative news flow out of the domestic front whether it is related to coal block or a political logjam in parliament. But surprisingly, September would be a better month.
I am quite confident that if ECB goes on track and the Europe situation starts to sort out a bit, I am a little optimistic on that front. I think the pronouncements by the US Fed were pretty decent on the Jackson Hole. I think things would fall in place over the next 2-3 months barring some more negative surprises from Indian macro front.
_PAGEBREAK_ Q: Is your optimism predicated largely on more global liquidity from US or Europe or do you see any improvement on the margin in any of the key local fundamental factors like earnings, growth and even the macro here?
A: I have picked the first one because after the Parliament session ends on September 7, it has its back totally to the wall and the fact that the Shome panel recommendations came dot on time, it shows the government is concerned. They want to do things and they are very scared about the potential downgrade of India. Therefore, they will be very aggressive post September 7. So I see domestic macros improving.
I won't be surprised if this time RBI pulls the rabbit out of its hat and comes up with the much expected liquidity or interest rate measures even at the risk of seeing inflation being high in the short-term. Inflation has become a very sticky issue not only for us, if you look at some of the euro data that has come out last week, even there, you are seeing that inflation signs are not very positive and it is above the comfort rate of the ECB.
So RBI may just take the gamble as a lot of other countries like Brazil etc have taken and take a shot this time and then wait-and-watch. So if a combination of a policy action as well as the RBI action is taken whether it is a form of liquidity, I think something will definitely happen there on the domestic macro front.
Along with the action from the ECB and the Fed, the Fed is again scheduled to meet on September 13, I am fairly positive. I don’t think that things are going to be any worse than what we have been. Whatever it is going to be, it is going to get better. I think if there is a chance that December quarter end, we may see earning upgrade starting because analysts have brought down their expectations, their earnings upgrades, their earnings projections to much lower levels. Q: The expectation from a lot of quarters was that the trend of what is doing well in the market and what is not will start to shift around. This means FMCG and pharma will slowly start giving way to more infrastructure oriented names. Maybe even the banks will do much better but that trend only keeps getting accentuated with no change. This month too, infrastructure, real estate, PSU Banks have done horribly and HUL keeps hitting new highs?
A: You have seen this; we have known this for years, it is folklore that market prices will remain irrational more than it can remain solvent. I think that is exactly what you are seeing in the question that you asked me. I am not denying the fact that there are major balance sheet problems with some of the infrastructure names and hardcore real asset names but that is where the real opportunity comes in. That is where exactly you need to step in and understand that these are the sector leaders, which would eventually sort out their problems.
They will give you pain, there will be irrational prices both what you are seeing in some of the FMCG and pharma name. At the same time, there is a negative spectrum on the infrastructure and capital goods names.
Therefore, you need to really take a call where you want to be. Do you want to be in places where the probability of a correction is 25-30% or do you want to be in a place where you will see pain for another 2-3 months but the upside is huge? That is exactly what all of us have to game and that is exactly what the risk reward equation is all about when you are in equity markets. Q: Today we have got an inter-ministerial meeting to consider the coal scam and allocations. What do you see as a possible resolution of that issue in the near-term? How would you approach that whole cluster of companies - the metal and power companies, which have had such a big blow because of this?
A: In fact that is a major problem which we are living with in the short-term. If we land up with an across-the-board deallocation or with substantial number of companies having their mines being cancelled and going through the process again, we are in real trouble. It is not just got to do with their mines being cancelled, in fact, the potential upside for these companies being impacted, it has more got to do with sanctity of contracts and sanctity of the allotment of various resources by the government and commercial contracts that governments have entered into with private players.
I think it has more got to do with that principle that would be totally destroyed and which would be very major negative for the country. So I think that is something which we need to be careful of. I am quite sure that the government is aware of this particularly after what happened in the 2G license cancellations, it has been a problematic affair. One thing that I am glad about is that even the opposition, at this point of time, is not aggressively posturing for a criminal investigation by the CBI. Therefore, the whole situation gets into a really mess as it did into 2G.
If massive cancellation of blocks doesn’t happen, I think we will be able to live through this and come out of it. But if it were to take a real adverse turn as some of the news report suggest at this point of time, I think we have got bad news ahead, which will be a major blow to the sentiment again.
_PAGEBREAK_ Q: The market has been quite ruthless on companies like JP Associates, which have had balance sheets in some level of disrepair. Do you think it has been too harsh or are these concerns warranted?
A; I think the market is being too harsh and it tends to go to the extreme. Yes, we do know there is a liquidity problem; we are aware there is a problem with most of these companies balance sheets, they hardly have any EBITDA to service the debts that they are living with. They probably overstretched them. Unfortunately, what has happened is some of the equity fund raising plan and some of the other capital allocation that was scheduled for these companies couldn't happen because the environment turned so hostile in the last 18-24 months. But I think that would be sorted out. I am pretty optimistic.
 
Yes, we may see lower levels in these companies, one doesn't know how low they can go down to but to say that these companies really vanish, these companies would run in to problems, would have to go through a process of restructuring or some kind of a massive bankruptcy or whatever, I think those fears are unjustified. There would be restructuring issues, there would be issues, which in any case, banks are already dealing with and I think most of it is already in the price.
 
The market is pricing in the worst in these companies. I wouldn’t be surprised if this could be a good opportunity to position oneself in these companies particularly companies, which are extremely asset rich, has spent decades in building assets like companies like Jaiprakash. I don’t own it but at least know that the assets are real on ground. Yes, it has a temporary problem, which may last a year or a two but to say that a company like that would be into real trouble, I disagree with that.
 
Q: What about oil marketing companies, there too, a couple of months back people had taken the call that the diesel price hike will have to happen, and that trade has not worked out, these stocks have started getting de-rated again. Do you think it will happen or the market will just get frustrated by waiting for some degree of flexibility in pricing?
A: The fact is it will happen but these are all political issues, we have lived with this. That is why I don’t invest in 99% of the government companies; I have burnt my fingers in early 2000. In fact in the late 1990s, when there was talk about divestment about these companies when nothing happened, they all went into cold storage.
Therefore, to take a call on any company where the government is a principle shareholder, it is a very difficult call because any decision regarding these companies is a political decision. More so in the case of companies, which are dealing with oil subsidies and oil distribution and sales to the end consumer, it is more political than anything else.
Given this backdrop, I don’t think one should game when it will happen. The best thing to do is to stay out. There are thousands other companies to invest in and to trade in the market. I would be better off there that trying to game as to when will it happen. We have had this deep value in oil marketing companies for 10 years but very few have got the timing right and being able to make money.
 
Q: Are you disappointed with the way the auto numbers are moving because all of us are looking for any kind of signs of troughing out of the economy, and then even a mild improvement beginning but again, the August numbers for the auto companies don’t seem to suggest that any momentum is picking up in the economy?
A: I am not disappointed because this is quite expected. RBI and other policy makers had to bring down the growth and consumption expectation. But unfortunately what has happened is they have killed growth and consumption in some sectors much more than what they have themselves anticipated. They have gone overboard and that is where you are seeing a good amount of criticism coming in for some of the monetary policies and some of the very aggressive actions taken by RBI.
I think that is the reason why I am not too surprised about the auto company numbers because on ground, in the last three-four months, if you spoke to these companies, the icing on the cake was the fear that set in this region because of Maruti. Therefore, people wanted to stay away from companies, which had exposure in the Gurgaon-Manesar region, not knowing as to what would happen.
A combination of these factors has led to a general slowdown. But my sense is that you have probably seen the worst and you may see an uptick towards the festival season, Diwali etc, they are little delayed this time. So probably, December quarter might be a better quarter for them or in fact even towards the end of September, you may see an uptick if RBI were to take some action because availability and cost of capital for consumption also has gone up in the last few months and that needs to be corrected.
As soon as that starts to get corrected and the interest rate cycle starts to turn favourable towards consumption in such companies, I think we would have seen the bottom in the autos as we saw in this quarter or the last month.