Maintain year-end Sensex target of 19000: Ambit Capital

Saurabh Mukherjea, head of equities, Ambit Capital believes that the fate of Indian markets will be decided by three factors going ahead.

Government’s clarification on General Anti-Avoidance Rule (GAAR), oil prices and if there is quantitative easing (QE) by the European Central Bank (ECB) in next three-four months, he told CNBC-TV18. "My sense is we will get these three factors and at least two will work out for India," he added. Mukherjea is relatively optimistic about Sensex 19,000 scenario between now and the year end. Meanwhile, he expects the government to give clarification on GAAR in the next 7-10 days. "A positive clarification on GAAR could give the market easily a 4-5% fillip over the next week to ten days," he said. Below is the edited transcript of Mukherjea’s interview with CNBC-TV18. Also watch the accompanying videos. Q: We haven’t had a special series in the one gone by but global markets seem to be incredibly intact with their strength, how are you calling this month for India? Do you think it will be one where we see a return of flows courtesy the global mood? A: The resilience of global markets has a lot to do with the fact that the US economic recovery, whilst it is stuttering does seem to have some legs in it. Secondly, on the ECB front, for all its evils, LTRO has put a backstop on the European situation. So, the confidence in the western world is at a different level to what it was six months ago. Now going forward, our fate will be driven by three things, government’s clarification on General Anti-Avoidance Rule (GAAR), oil prices and whether ECB does another bout of QE in next three-four months. My sense is we will get these three factors and at least two will work out for India. I remain relatively optimistic about the Sensex 19,000 scenario between now and the year end. Q: A 19,000 scenario is by the end of the year but if two out of three of those events play out in our favour, what kind of an immediate bump up do you think it could give to the markets? A: The first major catalyst to focus on is clearly GAAR. Between now and May 10, I would expect the Finance Minister to take a position on this subject. I will be very surprised if we don’t get a positive clarification on GAAR. Given the state of our current account deficit, given how dependent the government bond market is on FIIs and given the need for foreign capital in the economy, I will be very surprised if the FM doesn’t take the relatively soft line on the tax registration certificate for Mauritius or short-term CGP. If you look over the next 7-10 days, a positive clarification on GAAR could give the market easily a 4-5% fillip over the next week to ten days. That is the near-term, beyond that looking out further over next two-three months, oil will still remain an area of focus. If Brent begins a move towards USD 100 per barrel from its current position of USD 120 per barrel that could add another 5-10% to the market. So, the journey from where we are at the moment on the Sensex to till roughly 19,000 could be driven almost entirely by a positive clarification on GAAR and oil tracking our way. Beyond that, we do go back into the domain of longer-term fundamentals and that is a much more complicated debate. Q: How do you approach some of the defensive pockets now they have just been moving with increased strength and more premium valuations - for HUL for instances how do you approach that stock now? A: The Indian consumer is still alive and kicking, it is one part of our economy, which continues to be healthy year after year. So investor interest is high in this space and the valuations reflect much of that. On a stock like HUL, stocks are outstanding. They have surprised us on the upside but at 30 times earnings, I believe it has got its numbers factored in by and large. Our focus will be much more on finding B2C stories or light industrial stories which will continue to do well in the tough economic climate, but have valuations in the 15-16 time space. Some something like Cummins or Kirloskar Oil Engines in the light industrial space or Exide Industries in the car battery space. Those are sort of stories where we believe the consumer will continue delivering good numbers if valuations are reasonable that is where we would look to build interest rather than going after the front line FMCG stocks. Q: How interested would you be in the midcap IT space because the results have been quite exceptional, we have seen KPIT Cummins today but even Hexaware reported a strong set of numbers, is this space that demands attention now? A: The midcap IT space is quite heterogeneous space, all sorts of firms are there. If there is a broad trend to be deciphered there it is the US economy recovering, with the European situation broadly having bottomed out. The IT export story, the BPO, the out sourcing story will have some more momentum behind it in the coming quarters. To the extent, the smaller firms will benefit more in a better growth environment. Even the midcap IT firms do become interesting; a stock like KPIT Cummins is around 11-12 times earnings. KPIT is very interesting in the current climate. More generally, even in names like HCL Tech, I would say is worth looking at closely given the recovery is underway particularly in the US. _PAGEBREAK_ Q: Any thoughts on the current digitization debate? How you would approach some of these verticals either on the cable or distribution side or the core television properties? A: We find the distribution assets more interesting than the content asset.  Amongst the distribution assets, two cable assets Hathway and DEN Networks look quite interesting. Hathway Cable is a decent company, it has had a good run and my sense is July 1 is when the country goes digital. So, between now and then, building a position in Hathway won’t be out of order. The word of caution is that big upside in these stocks will come when the acquirer arise, whether it’s a large Indian acquirer or a foreign media company, which comes on the back of FDI being liberalised. But between the two assets, DEN and Hathway, it is certainly worth looking at them and trying to build a position because  distribution assets will become more valuable. Amongst the content plays, the two large content plays that are Sun and Zee, we don’t cover them. As a house, we don’t feel comfortable covering those stocks. My sense is that smaller media properties, smaller broadcast properties will face some acquisition interest in the coming year or so. But, it is hard to say which one and at what valuations. So the safer story on digitisation is cable rather than the content side. Q: You have been talking about a 19,000 target on the markets in an environment where your peers are either bringing down targets on the Sensex or talking about the potential of a derating. How much of these is courtesy an improvement in macros earnings potential? How much do you think is part of a broad global tide will lift all boats scenario? Is this more to do with the global situation or more to do with the turnaround here? A: I think what makes me bit more optimistic than perhaps our peers and what has helped us maintain a 19,000 target through what has been a difficult few months for India, is that when we talk to investors and when we meet investors, we can clearly see that for all the negativity about India there are these things which are driving a lot of investors thinking. The first is GAAR and I would be very surprised if we don’t get positive clarification on GAAR. There is so much at stake for the country that it will be surprising if the FM doesn’t clarify by GAAR in a positive manner. The second thing which has driven a lot of investor thinking is clearly oil. Brent Oil at USD 125 per barrel is a huge pain point for India. Without being an oil expert, I will be surprised if Brent continues drifting North rather than drifting South. Given what is happening to growth in China, one would expect Brent to drift South. So, that will be second positive for India. Thirdly, Long-term refinancing operations (LTRO), Quantitative Easing (QE) in the western world has been a positive for India over the last couple of years. Given what is happening in Spain, I would expect to see QE and LTRO to come back in some shape and form over the next 3-4 months. For all our negativity about the policy climate these three big triggers have immense influence on the level of Indian market. I expect at least two of this three triggers to work out in favour of the Indian market Q: How do you approach this telecom bunch now? How much weightage are you giving quarterly performance versus what comes through on the big regulatory issues for a company like Bharti? A: There are two things, which will drive this stock in the next couple of quarters is partly how the regulatory issues pan out. Our sense is Bhart is quite well placed to deal with both the 122 licenses re-auctioning and with the broader corpus of regulatory issues. The second key driver of these stocks will be how they deal with consolidation in the sector. It is now down to Vodafone, RComm, Bharti and Idea to slug it amongst themselves. My sense is that between these four players Vodafone and Bharti will benefit from hiking their prices and benefiting from reduced intensity of competition. Therefore amongst the listed players, Bharti is by far the best positioned both in terms of benefiting from the reduction in intensity of competition and in terms of benefiting from the regulatory changes. The results looked alright to me; I don’t think there were any great negative surprises there. But the stock will be driven by regulations and their ability to capitalise on reduced intensity of competition. The last three months of customer sign ups in Bharti have been very good and I expect that for 3-4 months as well. Q: What about the other incumbents in the telecom space like Idea etc if we don’t get a negative news as far as this TRAI goes, do you think something like Idea would benefit as well? A: Idea has been the stock to watch in this space over the last 12 months. There are couple of things about Idea, which make us more negative about Idea vis-à-vis Bharti. The first is quality of the customer; Bharti has much better quality of customers. Idea’s customers have been generated by extensive price cutting over the last couple years. When you have price sensitive customers, you are not going to be able to capitalise in an environment where intensity of competition reduces. Bharti on the other hand with higher quality customers, they are less price sensitive and it gives Bharti much greater headroom to raise prices and therefore raise profit margins, but Idea doesn’t have that luxury. Second thing is operationally, given Idea’s levels of debt-equity given the fact that they too had some impact from 122 license calculations we see them much more fragile from a regulatory perspective. We see less headroom to cope with regulatory set back both financially and operationally. The combination of the two and plus the fact that the stock has had a good run over the last few months, predisposes us to Bharti more than Idea. But, these two amongst the listed players would be better of the lot and amongst over players that is listed and unlisted, Vodafone and Bharti are sitting quite pretty at the moment.