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Last Updated : Feb 22, 2017 10:26 PM IST | Source: CNBC-TV18

Ambit's Mukherjea: 'Can't see why you should chase this market'

The market continues to inch up relentlessly with support from domestic fund flows, but Saurabh Mukherjea of Ambit Capital is circumspect considering the visible underlying macro weakness.


The market continues to inch up relentlessly with support from domestic fund flows, but Saurabh Mukherjea of Ambit Capital is circumspect considering the visible underlying macro weakness.


The Budget was not particularly expansionary, fourth quarter earnings are expected to be weak, and macro indicators suggest a sluggish economy with not much momentum in either consumer or capital expenditure, he said. "It is difficult to say why anyone would chase this market given the lack of macro or earnings momentum." 


Heavy flows often create disconnect with valuations, he said, maintaining that “valuations in plenty of pockets don’t make sense anymore”.

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Among sector-specific trends, he said pharma has pockets of undervaluation with some large caps also trading at 20-30 percent below fair value. He is reluctant on Information technology largely due to the impending impact of Trump’s policies on margins.

He is positive on fast-moving consumer goods sector, too, but feels multiples there look expensive.

Below is the verbatim transcript of Saurabh Mukherjea’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Markets have run away we are very close to 52 week highs, in fact all-time highs, very close to even all-time highs on the Index should one chase this?

A: We remain circumspect, we can obviously see the flows, and the domestic flows as you can see are sort of hitting record highs every month. So, even that the foreign institutional investors (FII) flows muted, domestic flows are powerful enough especially domestic flows into small and midcap equities are powerful enough to push the market up. We remain circumspect because we can see the underlying macro weakness, we think quarter four will be a weak quarter earnings, discussions with corporates, macro indicators do suggest a sluggish economy and an economy where neither on the consumer side nor on the capex side is where any real momentum. The Budget is not an expansionary Budget at one level. So, difficult to see why one should chase this market given the lack of macro momentum given the lack of earnings momentum.

Anuj: Is Reliance the next leader of the market, the way we are seeing kind of big move over the last few days and now that we have market ascribing some value to Jio as well?

A: Without going into stocks specifics whether I look at several small and midcaps, whether I look at some of the larger names in the market even the PSU banks you are seeing valuations in plenty of pockets in the market. You are seeing valuation which don’t really make that much sense any more. That is true I think across the apiece especially in small and midcaps even in PSU banks, banks where the book value itself is somewhat questionable. You are seeing the banks trade into premium to book. So, I think you do get this phenomenon in stock markets where heavy flows often create a disconnect between reality and valuations and I think we have several pockets in the Indian market where I think that description would be an apt description today.

Sonia: Juts to take that question forward, I mean Reliance on one hand is up because of the way Jio will start to monetise soon but on the other hand it raises once again concerns for the entire telecom sector, the other incumbent players – Bharti Airtel, Idea Cellular etc. How are you positioned in that space as a whole? Would you still be cautious or is there a contrarian call on the upside here?

A: No, I think that thinking there has been for a while reasonably consensus oriented because that it is going to be unforgiving war in Indian telecom’s war where you will see consolidation, consolidation which is publicly known to be underway in the sector. It is unlikely that in the near-term minority shareholders, public shareholders will win from this sort of round of bloodletting in Indian telecom. Good for the consumer, super news for the consumer. Not so good for shareholders.

Latha: Where do you find pockets of value now?

A: Increasingly, hard to do, so one sector where I do believe because of the FDA’s very sort of active stance on intervening in the Indian pharma sector I think the pharma sector I do believe there are pockets of under valuation. Large well run companies who have a reasonably clean regulatory track record who should be able to deal with the regulatory wraps on their knuckles that they are getting but whose valuations are not really reflective of the potential of these franchises, so even largecap pharma I think there are names where which are trading 20-30 percent below fair value.

I would be little bit more hesitant about IT in the sense that what Trump is doing is reasonably clear in the damage it is having on the IT companies. Their operating margin will be under pressure over the next couple of years, but even in IT as I dare say at least on the largest name in the sector I think perhaps the pessimism is overdone. The buyback that was announced couple of days ago was reasonably significant event but I think pharma more than IT.

The other place I would look at is the largest name in FMCG. I know the Budget that we just had was in particularly expansionary, most of the talk about rural spend in the Budget was broadly in line with the previous year spend. But as we go in to two years of active elections it is difficult to see any government central or state holding back from given largest to rural India. So, the largest FMCG names, the largest pharma names and perhaps one or two of the largest IT names those are places where there is some value. Even on FMCG optically the multiples look expensive. But, beyond these two or three pockets and beyond say select small and midcap plays I think the market as a whole is increasingly challenging to find value out there. The huge surge of money into the market really has pushed our valuations quite aggressively.

Anuj: What about metals because that’s seeing a huge bull market in the underlying metals itself overseas in global markets do you get a sense that we could be at the cusp of 2003 kind of a rally here, these stocks have run-up a lot but in commodity cycles they could surprise?

A: You have hit the nail on the head as they are around the 70-80 percent correlation between the stock prices of Indian metals and mining stocks and the underlying commodity price movement in the US and UK markets in the London Metal Exchange (LME) for example. So, given that sort of very tide linkage between the Indian stock prices in metals and mining and the global commodity prices unless I have a reasonably clear view where aluminium, iron ore and steel prices go unless I have a clear view on that it is difficult to give a definitive point of view that it is worth buying metals names.

We can see bottom fishing happening over there even in some of the less reputed metals and mining stocks. But given that we don’t have a definitive view on whether the global commodity cycle is heading nor have the Indian metals and mining’s stocks covered themselves in glory with their capital allocation over the last decade we remain circumspect on that sector as well.

Latha: In your Unusual Billionaires book you had handled Axis Bank and that is why I am asking you to discuss that stock how would you evaluate after the kind of results, it had larger than expected non-performing loans (NPLs) and now there is talk that everybody is interested in the bank? That bank itself and also now in your Unusual Billionaires would you think that you should have included some more NBFCs?

A: As we discuss, I remember discussing this on the show when the Axis management was on the show in your studio. The bank obviously has issues, the issues are well known. The asset quality issues are well known. On its own I think Axis Bank will probably have at least two more quarters where the asset quality issues persist. What makes it very attractive, what makes it an outstanding franchise is the strength of the underlying franchise line. You have got a good current account saving account (CASA) franchise in corporate ending. You are one of the largest corporate ending books. You have a strong Equity Capital Markets (ECM) and Debt Capital Markets (DCM) franchise and these are well known strength that I highlighted in my books which is going to make Axis very attractive.

As is being widely speculated there is talk around the bank. I think it is an attractive franchise. I think the franchise has plenty of potential in the years ahead. As we discussed on the Unusual Billionaires program in your studio every decade it goes through a new MD or a new management change and in that regard I think Axis is a story of multiple people very few years taking charge taking the bank forward. So, I don’t have a concerns about the value of the franchise and the future of franchise. Yes, there are near-term issues in the asset quality which are well known, but this is a powerful franchise in a country where debt capital markets are becoming deeper and far more relevant to the BSE 100 corporate. I think a franchise like Axis will be central to the expansion of the financial system.



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First Published on Feb 22, 2017 10:53 am
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