Correction to be small; financial services safer: SBI Cap

For PSU banks, whose valuations have fallen sharply, he said lack of capital will be a bigger concern than bad loans.

From a two-year perspective, Sabarad sees the RBI further cutting rates and the market going higher.

Below is the transcript of Mahantesh Sabarad’s interview with Latha Venkatesh & Ekta Batra on CNBC-TV18.

Latha: Do you think there is a lot more bad news to discount? Should we see big losses at Index level?

A: After the result season where there were shock surprises in terms of results of certain large companies, a lot of the market participants have now been factoring a lower earnings trajectory in the years ahead. Some of the earnings estimates are yet to be lowered because in 2015-16, market is factoring in 33 percent kind of earnings growth on the Nifty. Probably, we will not see that much and that 20-21 percent thereafter in the subsequent year.

Probably, both will average down to a 20 percent kind of number or probably the growth rate will be higher in the later year. So, the earnings outlook does seem to be subdued and the market is reacting to that. Apart from the credit policy, yesterday, for example, people were asking why the market fell so much.

It was a 25 basis cut; it was as expected and extra. Although, the Governor has been known to be a little hawkish, he continued with a mere hawkish kind of commentary. The fall of yesterday was telling us the market is disbelieving the earnings forecast of most analyst right now and the earnings downgrades are still due.

Ekta: I was looking at a weak to date losses for the Nifty stock. It is Sun Pharma, which is topping the list with the cut of 12 percent. Are you confident in terms of the Ranbaxy integration or do you think, FY16 will see more pain and further downside for Sun Pharma?

A: It is very difficult to talk about this merger and integration issue because from an analyst perspective, most street analyst were shocked, the most shocking results of the quarter gone by was perhaps Ranbaxy and the pharma sector in general because for the last 5-6 years it has never surprised on the downside by such a large extent.

Having said that, we at least the believe the management will be able to overcome the integration challenges going forward. As a stock and business, Sun Pharma will continue to see better days ahead.

We don’t know the pain in next 3-6 months, so it is very difficult to judge. The stock is reflecting merely the uncertainty of the time element in terms of the integration. While the integration will end up positive, we are pretty sure about that, it is just that interim period people don’t want to take the risk on the stock as yet. For us it is still in a way remains attractive and hence a buy.

Latha: In your previous reply, you were saying that the market is still coming to terms with the analyst forecast and expect that it will even be worse than their already lowered forecast? What could be the measure of loss? You take any measure, will it be Sensex, Nifty or any other. You think there is another 10 percent fall waiting to happen or even more?

A: Let us look at it in two buckets. First one is the valuation one, which is on the earnings. Earnings trajectory is going to come down. Valuation is something because of the market correction. We have seen that the valuation levels are, at least a year back, are seeing the forward valuation numbers that are telling us it is gone to the levels one year back.

Index-wise or some of the other indices, other indices are still higher so that valuation having remain virtually static or one year back some of the down grades of earnings has happened. Some is yet to happen.

From a valuation perspective, we will see, while the earnings will fall down, valuations will inch up, because now you will see growth rate better. Markets are always forward looking. The trade off seems to suggest that probably market will have, not a sharp fall going forward perhaps a slightly correction into the future.