Buy on dips; earnings to stabilise soon: DSP Blackrock

Below is the verbatim transcript of Anup Maheshwari's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: For starters how do you expect the market, we have been talking about consolidation, we are already about seven percent down, do you think the market now looks ripe for a 10 percent cut?

A: Difficult to call the short-term, to be honest, but obviously there has been some disappointment around earnings. That has been the case for a bit. If I went back to September, October and if we were to have the discussions that earnings are going to be downgraded by 7-8 percent who would have thought the markets would even be at this level today. But the fact is there has been a bit of disappointment.

On the other side, the government seems to be progressing quite well. So it is a bit of a mixed picture. And then of course, you have to throw in a bit of what is happening globally. So, there are just too many factors acting in the short run, so it becomes difficult to really… It is pointless frankly to try and predict the immediate near-term market of the market.

But the fact is normally first quarter of the year we have seen has tended to be a little soft, particularly for midcaps but as the year progresses they do tend to come back. And, overall, we are still progressing with the view that eventually earnings will normalise after seven years of sub-par earnings. And as that process comes to this market, it continues to be just a buy-on-decline market.

Sonia: So when you say buy-on-declines what are you looking at? I mean is now the right time to buy? Or do you think that one could get better opportunities once the earnings season is out of the way?

A: We are always very loath to say this is the right time, there is no one perfect day in the year that it is worth buying or at any point in time. The important thing is it is a phase, so what we are encouraging still for a lot of retail investors is a systematic investment format of investing and you still buy right through this type of market range, it does not really change much.

So, the point is, as long as your markets are in a zone where valuations are still tolerable, where equities continue to look better than most other asset classes, where the upside looks fairly reasonable, you keep owning the asset class and keep adding to it if you have the ability to. And that is the sort of zone we are still in.

Latha: We did see some bit of green shoots. Maybe I am just clinging on to straws, the advance tax numbers were not bad, as well we saw a little bit of turn around in the four wheelers. Will Q4 therefore be an improvement to Q3?

A: I doubt, not dramatically, Q3 of course, we have to take into account was a bit of a one-off also because of a lot of inventory losses because of the initial reduction in crude prices. So, you had in certain sectors particularly oil and gas some very unusual numbers which will all reverse in this quarter. So, there will that normalisation.

So, it will not be worse than Q3 in that sense, but it is definitely not in the mode of suggesting a big pick up either. That is something that now seems to get more pushed into the second half of net year. But next year will still be better than what we have seen in the current financial year.

Sonia: One of the stand-out performers has been the telecom stocks and now that the auctions are finally done and out of the way, it looks like the overhang is out. Of course they will secure spectrum for the next couple of decades. So there is that positive as well. Would you buy any of telecom names now?

A: We are looking at the sector again, we have struggled with the view on the sector because every now and then there is big dollop of capital expenditure (capex) that needs to be done. It alters your return ratios totally and we have not seen enough of pricing power in the sector yet.

So the current discussion or analysis is more around they will actually manage to start taking RPMs up, exhibit some degree of pricing-power by reducing discounts for them, the market and if they do that, then to some extent they off-set the big capex that they have done to acquire or to continue with their spectrum.

So, what is going to be very critical is to see if the pricing-power of the sector or not; if it does not, then the sector continues to lag because ROEs are very low in this sector. But if they do manage to get pricing-power, then that is a big leverage factor as well. So, on balance we are inclined to be a little more positive now.

Latha: The government has been labouring at so many of the knots in the infrastructure space. When do you think things really clear up? Should we begin to see earnings impact in the second quarter of FY16? In the second half of FY16? Which will be the first positive quarter, you think?

A: Difficult to gauge the lead-lags on this. One thing we are very clear on is the government will start spending very aggressively from pretty much next month onwards. And lines of funding have been organised will continue to be organised, so I do not think funding will be -- it is not easy, but it is not going to be the stumbling block.

And the government is clearly going to be the biggest spender in the entire system for the country. So, once those orders start going out and it finds its way into order books of companies and different sectors get impacted with different leads and lags and it will probably hopefully come through, as I said in the second half of next year. But, the government is going to spend, that is almost a certainty and very aggressively.

Latha: So, in a sense of high-risk and therefore high-return would you want the public sector (PSU) banks? How are your bets placed in the financial space?

A: In financial space, right now we still have more private sector banks versus PSU banks as a proportion of our holdings, but we do hold some PSU banks. We had bought them earlier, we had not anticipated the sort of increased non-performing loans (NPL) that they ended up reporting last quarter. So, this is obviously another quarter that might be a little tough for them. But generally when you buy these banks, it is natural to look at the last one year or few years or get the recency effect into your view on the sector that these stocks just do not perform.

But the fact of the matter is when you are buying a lot of these banks at substantial discounts, if you have the right time horizon in place, if you are willing to hold on for 3-4 years, we do not know when the turn will happen but there is an expectation clearly that the probability of returns is very high.

At some point there will be a turn, these things are never very apparent, if it was obvious to everyone, these stocks prices would be already higher. But it definitely continues to be worth holding on to PSU banks if you do hold them and private sector banks in any case continue to perform reasonably well.

Sonia: So, just on final word then, on your range for the market or your expectations on the downside for the next say 6-8 months?

A: I could toss a coin and tell you an answer, to be honest. No clue per se but, the point is -- I keep repeating this -- that if the earnings do come back as we are expecting them, as the government starts spending, as people’s optimism increases, domestically we are still in better shape than most of places. There is going to be a global effect as well in terms of short-term movements in the markets, we cannot really predict that.

But net-net we still feel that markets will be higher over the next 12 months than they are today and reasonably higher. So the point is if equities continue to still offer something like 15 percent long-term annualised return with the current valuations that we are sitting at, we just stay put with them.