Brace for Nifty at 7600, downgrades post Q4 earnings: IL&FS

Below is the edited transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: The first question really is about this five day, consecutive five day selling that we saw in the markets. Do you think there is more weakness that the market has to live with and has to discount?

A: This is the beginning of the earnings season and the earnings season is going to turn out even more difficult than what we had anticipated it to be. The early results which are normally good have not been so good this time. And we had been contemplating that the market would be range bound now for several weeks and several months to come and the levels we were looking was 8,000-9,000. So, the market has been trading in that range and we saw it move up sharply towards the head and then come down but it has been within that range. But having said that, given the fact that earnings are going to be more, are maybe going to be worse than what the market expected and here I would like to make appoint. I think analysts have been too positive and downgrades have not happened in time. So the earnings estimate are still higher than what they are probably going to be even for this quarter as well as for the next two quarters. So, you will see some more downgrades happening and that will keep pressure on the markets. So, now we believe that at some point of time, this 8,000 level could also get broken and the markets could go into a lower range of 7,600-8,600.

Sonia: 7,600-8,600 is what you said could be the range in the near-term? A: In the next couple of months, yes.

Sonia: The IT stocks have been the front runners in terms of the disappointment this time around whether it is Wipro, HCL Tech, Infosys as well tomorrow is expected to be week on Friday rather. How do you deal with this weakness? Do you use every dip as an opportunity to increase your exposure in the IT stocks or does it move to the back burner now in your portfolio?

A: There are two or three things happening. One is of course the cross-currency problem. And that is the strength of the rupee itself is a big problem now not only for the IT sector but for the economy as a whole. And this is a dichotomy if the rupee depreciates, inflation goes up, then bank interest rates do not come down. But if the rupee does not depreciate and it has been very strong against almost all currencies, you are having this export problem, exports are declining and that keeps the economy from growing too fast. So, at some stage and I do not know when that will happen, but at some stage the rupee has to depreciate from here in order for the economy to be competitive. And we have seen that as per the Reserve Bank index, the rupee is overvalued by a pretty huge amount at this point of time. So, over the medium-term when the rupee does depreciate the IT sector will again, only IT profitably will again start to improve but for the time being things are difficult.

The other thing happening in the IT industry is somewhere below the surface, this whole change in technology; digitisation and cloud-computing is going to have a very revolutionary impact on the industry over the next two, three years and it is going to be a big challenge for the Indian software sector to cope with that. So, therefore at this point of time one should be light on IT but if you see the rupee depreciating at some point of time, then maybe one can get back into it in a bigger way.Latha: You spoke about analysts being slow to downgrade earnings and that earnings will be less palatable than the market has been prepared for. Where exactly are you expecting the disappointments? Which sectors or stocks?

A: Almost everywhere and we have seen that IT sector very particularly we have seen that happening. To some extent even pharma could be one sector where you could see downgrades because that is another sector which is going to get impacted by the rupee strength and pharma stocks have really gone up a lot. The cyclicals also; private sector banks probably in terms of the valuations they were at, you could see some disappointments happening and you could see of course disappointments in public sector banks continuing as well as in the rest of the cyclicals. So, it is going to be almost all across.

Latha: Private sector banks, the disappointment maybe more because of the valuation issue or do you think their results, their non-performing loans (NPL) will also show that they have not been spared the economic downturn?

A: Largely till because of the valuation issue, but we did see last quarter in case of ICICI Bank for example, there were some concerns which emerged on the asset quality issue. So, we really need to watch out for that also.

Sonia: For the market as a whole, are we still in a structural bull market do you think? Or is that theory now getting challenged because of weak earnings, no recovery in the capital expenditure (capex) cycle and now adversarial rulings as far the tax situation is concerned?

A: These are structural bull markets. They continue while they continue. So, it is at times very difficult to say whether we are in one or we are getting out of one. However I would presume we are still in a structural bull market given the macro economics and also the fact that there is huge amount of liquidity globally and all the positive macro economics factors we have talked about several times. So, keeping that in view I would say yes, we are in a structural bull market, but within that you are in for a pretty, fairly long and a pretty deep correction and that correction has been ongoing now. And as I said earlier, we were expecting this to happen, but now we are lowering our range a little bit further.