Correction seen, but Nifty to hold 8200; like pharma: Ambit

Below is the transcript of Pramod Gubbi’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Give us some clarity on how you see the slightly near-term, I don’t mean today and tomorrow, but for the quarter do you think the gains are over for this market and we would be in a longish consolidation phase, what is the range of that consolidation for the Nifty?

A: I would think so. We are pretty much running out of catalyst. The last catalyst was the Budget and we had a very surprise rate cut. We could potentially see another rate cut next month but outside of that we are running out of all positive catalysts, in fact heading into what looks quite a dire earnings season. However, every channel check that our guys on the ground do or any corporate that we hear, situation on the ground seems quite dire as far as demand is concerned and that is likely show up in pretty much weak earnings season and that is not going to help the markets in terms of further triggers to hold up. Therefore, to that extent I would assume the risk to the market from hereon, at least from quarter or perhaps even two quarters standpoint could be to the downside with a potential rate cut, the only positive trigger on the horizon.

Sonia: What could the extent of this pullback be, the Nifty has already lost about 5 percent from that top of 9,000 that we hit last month. Is there much more downside to this market in the near-term?

A: At the market level we may be looking at closer to the bottom but if you look at this correction, it has been largely restricted to some of largecap index names and some cyclical names. We haven’t seen a major correction in some of the quality names. Even the quality midcaps continue to trade at reasonably higher valuations.

Our sense is there will be a time because I don’t think even in quality names we will be able to escape this sort of a demand destruction that we are seeing on the ground. So, to that extent we might see some correction in those names that have held up which may not reflect entirely at the index level.

However, that will be an interesting standpoint whether this quarter or the next quarter’s results which will crack open some of these highly valued stocks, that will be an interesting time to look at these names and that is what we are recommending investor do to – hang on for right now and wait for that correction and then start adding to those quality names.

Latha: Should one worry about the US rate hike at all, is there going to be even a wobble for either Indian bonds or for Indian equities?

A: I think in some ways there is enough visibility now given the sort of expectations that have been built up ahead of the recent Fed meet and the reasonably clear guidance that the Fed has given in terms of what it expects from US fundamentals and what it takes for those fundamentals to change so that they can implement a meaningful rate hike. You might see the beginning of a rate hike. I think that is more or less factored in but a series of rate hike or a meaningful rate hike over a the course of the next 9-18 months is something that is unlikely to be a negative catalyst as far as we see. Maybe over the short-term or a few days after the first rate hike you might see some sort of volatility but unlikely for that to be a meaningful negative catalyst for global markets be it bond markets or equity markets, at least that sort of out of the horizon for now.

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Sonia: The foreign institutional investors (FIIs) have so far pumped in about USD 5.5 billion in the Indian markets this year. Do you see that trajectory slow down because of the concerns that you just alluded to?

A: Possibly so. I think most FIIs are also cognizant of what is happening on the ground in terms of the weak earning season that we are likely to face yet we have seen these sort of inflows. One of the biggest factors has been that there isn’t much alternative in terms of attractive markets elsewhere in the world which has meant that India has still attracted some of these flows and irrespective of the short-term pressures what this government has done in terms of implementing some of the reforms programs so far is giving the longer term promise for those investors who are at least willing to take that long-term bet. So, that will continue to hold up.

So, we might see some fatigue coming in, maybe incremental buying will stop but I doubt if you will see meaningful outflows happening. There might be a bit of profit taking in names that have done well but I am not sure we will see a big pullback. So, that will mean that the markets will largely be in consolidating mode, perhaps, a bit of a downside at the index level but some of the quality names are due for some meaningful correction.

Latha: When you say minor downfall you will see 8,000 getting challenged at all or that holds?

A: I think 8,000 should hold. It is hard to predict from a fundamental perspective but the way we are looking at the market right now is as we pulled back our earnings estimates for FY16 quite meaningfully, so at the Sensex level, we are looking at an earnings per share (EPS) of about 1,700 given what I said about the long-term promise that the market holds.

I don’t think you will see a derating in the Sensex PE multiple so that would mean that we are still looking at a year end target of about 34,000 which uses a 20 times multiple. So, maybe the first six months will be tough but the second half of FY16 should see a reasonable pullback or a rally taking us closer to 34,000 on the Sensex which means on the Nifty I don’t think you will see anything below 8,200 at least based on what we see currently.

Latha: You began by saying that this could be a dire earnings season. When do things brighten up at all in your analysis, Q1 FY16, Q2 FY16?

A: Quarter one unlikely for sure. I think the sort of demand destruction we have seen will take a while for it to percolate. Quarter two maybe but I would rather bet on second half of FY16 rather than first half. I think some of the changes that the government has made will have recurring implications in terms of demand slowdown in certain segments. It will take a while, at least two or three quarters before that bottoms out.

Sonia: You did mention your Sensex target of 34,000. So if the long-term potential of this market is intact what are the stocks or sectors that you should be buying right now?

A: In terms of sectors at this stage we had been positive on domestic cyclical but given the events or given some of the initiatives that the government cyclical will take a while before they recover, it will be at least a couple of quarters before we start recommending investing into cyclical again.

As of now the pharma sector looks attractive given it is away from all the domestic events and still export driven, most of the names are comfortably poised to deliver 20-30 percent earnings growth, valuations have gone up in the past few months but still not overly excessive to push back any fresh buying. The IT sector because it is away from the domestic events. Could be attractive particularly some of the midcap names which are positioned into the digital theme that we are seeing creeping into the demand. Otherwise inline with some of the government initiatives particularly in areas like roads, railways and defence, we might see some domestic activity. So that would be few sectors to look out for from a domestic perspective.