Bottom up approach important; see more downgrades: Emkay

Valuations appear to be protected on the downside, though it may crack a bit on global flows and Bihar outcome, says Krishna Kumar Karwa of Emkay Global Financial Services. He says from now to year-end, the market will be focussing on a few important events such as the US Federal Reserve rate hike and the government's reforms push. According to him, a bottom-up investing approach is important.

He also sees a few more analyst downgrades going ahead. As far as the earnings growth estimate for FY16 is concerned, he says Emkay has been rather conservative and hasn't altered its expectations much.

He is bullish on private sector banks, four-wheeler makers and in that context he likes Tata Motors.Below is the verbatim transcript of Krishna Kumar Karwa's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: How do you size up the market itself, what is the sense, are we likely to test 7,500, is there substantial weakness still left to play out?A: Currently if you look at, result season is almost behind us and most of the results have been in line with expectations and in the second half of the result season we have seen that there have been some disappointments etc. So market has reacted in terms of the results and we have seen a decent 300-350 point correction from the top.My sense is that valuations being where it is, at current levels the downside seems to be kind of protected. So maybe a few hundred points -- yes, we could possibly go down further based on global flows or maybe the election results in Bihar etc. However, to see a substantial cut or much more sharper cut, we are not of the opinion on that side. We believe that market could be more bottoms up kind of post Bihar elections.Sonia: So from now until the end of the year, how do you expect the markets to pan out, give and take all of the cues that you have alluded to, what kind of trend do you see for the markets?A: People will be looking forward again to two-three events which is again they will start looking at the global scenario in terms of Fed rate hike or what is the formality on that front and locally how did the government able to act on its various reform processes, which kind of brought it up in the last parliament session. So those are the two important events that market will start focusing on. That will possibly drive the sentiment as far as the overall market is concerned.If the foreign institutional investors (FIIs) flows etc seem to be aggressively negative etc and stock comes up then again bottoms up investing will come into place. So my sense is that we are headed into an environment where our core bottoms up investing will be important and the macro event will have their impact but will lose their flavour over the period of time.Latha: Would you say the worst is over for the state-owned banks, is there a tactical or an investment buy here?A: These agencies, which is Moody's and Fitch -- the reports that they have come out, they are possibly good beginning to start with in terms of at least more additional NPAs in the system etc seems to be slowing down, that is what these reports are saying and that is what the expectations are. I would think that you should have once State Bank of India (SBI) comes out with its results and talks about how the NPA situation is because they are an important part of the system that should be a clear cut indicator in terms of how things are panning out.In terms of the various results, which most of the private banks have announced etc, it doesn’t seem that the pain is out of the system. So once the public sector undertaking (PSU) system, PSU banks were the ones who first came out with their challenges. Once they start showing better numbers on the NPA front, that should be a clear cut business.Sonia: So at this point in time you would not advise buying into any of the larger PSU banks?A: Most of the PSU banks as far as valuations are concerned, they are quoting at very fair valuation or below fair valuations on historical basis. What is constraining investor from investing in these banks is firstly -- because of their poor capital adequacy, their inability to grow their portfolios and the second is the concerns on their asset quality itself. So these are the two reasons where there are challenges in terms of investing.So if you are a value investor then probably PSU banks offer you a great opportunity to invest in but having said that, we are seeing that private banks are gaining consistently in terms of the market shares. So that is the dilemma in terms of value versus growth, what is the kind of outlook one has towards investing. However, if you are a hardcore value investor then possibly PSU banks give you an opportunity. Only question is the timeframe that you are looking to invest in -- maybe it could be more back-ended, it could be more than 12-18 months whereby you may earn necessary returns._PAGEBREAK_Latha: What is this earnings season signalling to you in terms of the cyclical recovery? Is this the quarter when the number of upgrades will outnumber the number of downgrades, will it be Q3? What is the overall sense you got from corporate earnings?A: We believe that still some more analyst downgrade etc will happen in the system. So in terms of their recovery, are the stocks pricing in the slowdown in the system? We are closer to it but maybe not at the bottom of it. So there will be some more analyst downgrades, which will possibly happen and maybe the next half of the year is when possibly the expectations will possibly bottom out. That is the sense that we have as far as our analysis is concerned.Sonia: I wanted to ask about the auto sector, because over there we have seen some signs of a revival in demand in this month, especially in some of the passenger vehicle makers like Mahindra and Mahindra (M&M) etc. Is this a space that you would increase your allocation to and if yes, into which stocks?A: As far as the auto sector is concerned, we have been bullish on the four-wheeler segment and that sector continues to do well. As far as the two-wheeler sector is concerned, there have been challenges in terms of growth. One of the smaller companies in that segment has been growing much better than the bigger two companies.As far as the medium heavy commercial vehicles (MHCV) sales are concerned, they seem to be on an uptick. There is the second or the third month where we are continuously seeing that the sales are improving. So that is an early indicator as far as maybe the replacement demand seems to be picking up as far as the MHCV is concerned.Our bias is currently towards the four-wheeler segment, that is where we believe our top pick is and then we are also bullish on Tata Motors. So these are the two stocks that form our top buys.Latha: What is the earnings growth you are working with for FY16 itself and are you getting a sense that you may have to revise it lower?A: Our team has been very conservative in terms of our overall earnings projections. So no doubt there have been downgrades but still our overall earnings estimate -- we are not substantially altered in terms of the expectations. Some of the sectors where we have seen a lot of mismatch in our estimates versus the actual have been on the agro-chemical sector where obviously the poor monsoon has impacted the earnings of many of the companies and there we have seen a substantial gap in terms of what we had estimated and how earnings have panned out.As far as auto is concerned, margins have been better than expected, so there we have not seen any great downgrades in our earnings estimates.Latha: Within the Nifty you spoke about Tata Motors as being one of your better bets in the four wheelers. What are the captains of that space? We saw a major disappointment coming in from Larsen and Toubro (L&T) in terms of their order book and their revenue guidance. What are your standout performers? I am generally asking you on the Nifty what are your other bets?A: There are challenges to be able to recommend aggressive bets on the Nifty component itself because the challenge over there is that the stocks, which are performing well or where the valuations are not in your favour and wherever there is value, there the growth itself is a major concern. On bottoms up basis sometimes you have a issue in terms of recommending stocks very aggressively in terms of the valuations versus the growth dilemma that we have.Having said that, we continue to like the private sector banks. They are gaining market share continuously and valuations also have come up. The top two-three private sector banks is where we believe that whenever there is an uptick in the economy per se, they should be the ones which can give very decent returns, so that is one sector.Then in autos I mentioned a few names that we like. So those are the segments that we are aggressively pushing.As far as the infrastructure is concerned, no doubt there have been challenges in terms of the order intake guidance but if you believe in a longer-terms perspective, then stock price correction itself offers you a good entry level into segment, which should do well over a longer time frame.Sonia: What is your view on the aviation sector because there has been so much interest over there and now with the IndiGo IPO on the anvil, a lot of investors are lapping up on the other names? Would you advise retail investors to do the same?A: We do not have a coverage on the aviation sector. Having said that we believe the play on the aviation sector is basically a growing play on the rising Indian middle class and the growth over there is phenomenal as far as the overall passenger segment is concerned. With the benefit of lower aviation fuel prices, it seems that all the aviation companies are doing well.Having said that this is a very challenging sector and we have not seen sustainable earnings globally in terms of the various aviation companies. So I would say that currently the environment is right, the valuations of listed companies are very reasonable. So if they are able to sustainably grow the segment and grow their profitability, they offer good investment opportunities.