Don't think a 15-16% growth in earnings is a given: Udayan

Currently, India is in a trade surplus -- it augurs well for the equity market and the currency. "It is excellent news for the rupee versus against other currencies," he said, adding that India has all the ingredients of outperformance.

India is in classic defence mode, he said, referring to the trades in the market. "We are like Asian Paints. We didn’t rally when EMs rallied."Finally, on the present government completing two years in office, he said a few politicians in Delhi don't determine the way how the market performs.

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

Sonia: There has been a lot of volatility in our market courtesy weak global cues and Mauritius Tax Treaty issue, but give and take everything; it has been a buy on dips market so far. Do you see that trend changing anytime soon?

A: I think the price action has been very encouraging if one has been bullish on the market. I am very positively surprised with the very shallow corrections that's taken in given the news flow over the last few days and that can only be read optimistically if one is a screen watcher. So there is nothing wrong, the screen has not taken any wrong step over the last three-four weeks, in fact longer.

However, as I said last time, the strength of the market often is shown by the corrections and the depth of the corrections and given that yardstick this market has been remarkably strong over the last three or four weeks. We have gone close to 7,900-8,000. The market is feeling a lot of resistance, sensing a lot of resistance around those areas but the pullback, first it was 7,800 and second pullback took us to 7,700 but not further and we bounced right back within a couple of days to 7,900 zone again. So the market seems to be falling very laboriously. There is no momentum on the way down, it is almost like 150-200 point pullback and within two days the market reclaims all its lost ground.

So if you are a technical trader or you are a momentum watcher, I think you have to say that the market is in remarkably strong hands right now. What happens from here on? We will see, but going just by the price action, I think the screen has looked nothing but bullish over the last few weeks.

Latha: The FII position especially with respect to Participatory Notes (P-Notes), now with the Mauritius Treaty amended and General Anti Avoidance Rules (GAAR) becoming effective April 1, 2017. What is your sense of how the P-Note guys will behave or ought to behave?

A: It is an irritant. There is no question about that and particularly the P-Note investors and they are also trying to figure out how they should be approaching this scenario. They do not need to do anything tomorrow or day after tomorrow. So there is a bit of time and they will take a rational call on this. Also keep in mind that this is not just about the Participatory Note investors or participants but also all kinds of other short-term FII investors in the market, but my sense is that FIIs probably like one part of it which is that now there is certainty, there is no ambiguity in which way our tax laws are headed and they can also sense that long-term capital gains (LTCG) tax is coming. It is just a matter of time; maybe it will come in the next Union Budget or somewhere around that but the way the cues are panning out, LTCG will be a reality in the next 12-15 months, if not sooner, but they have till 2017 and then they have a phase increase till 2019 to get their shop in order but the determining factor FII perspective is still going to be what is the emerging market (EM) outlook for the next couple of years. I think the tax angle is important but if you land up in a situation where in the next couple of years the global view changes and a lot of fund managers come around to the view and there are lots of reports swirling around to that extent that maybe after so many years of underperformance EMs will have a good time. If they take that view then they will swallow a lump that tax and carryon with investing in the market where they see profitable returns, but this will start weighing heavily on FII flows, if the EM view turn against the general grim that we have had for the last two months or so. If people start sweating on emerging market assets once again, if the few turns dim and they say one more bout of underperformance has started then this will be another straw on the camel's back and say we have got underperformance plus a tax irritant out here and that will weigh on India's relative performance compared to other emerging markets. So the key thing is to keep an eye on the EM outlook and perspective. As long as that is good, this will be digested. However, if that turns then this will become a problem that we will have to deal with from a relative perspective._PAGEBREAK_

Sonia: What about the earning situation so far. We have got some ugly numbers from public sector undertaking (PSU) banks but in any case that space is under owned, so it may not make too much of a difference to the market, ex of that how have you read into earnings so far?

A: It is not bad. We are halfway through. I think half of the Nifty companies have reported so far. I am not a fan of take this company out and take that sector out and therefore we will arrive at this percentage growth number. Let's take it in a composite way. I think we are talking about 6-8 percent growth so far, on topline and bottomline that we have seen from the first half of the Nifty companies - that is not something to blow the lights out but it certainly a little bit better than what we have seen in the last few quarters.

We have to watch the second half of the earning season equally closely, there have been a few recent disappointments but the one hope that everybody has on the street is, is this going to be the quarter where we sit back and say this was the last quarter of earnings downgrades after, I do not know how many quarters that we have had of marking down earnings expectation quarter-after-quarter-after-quarter. Is this quarter going to be the quarter where we sit back and say we did not need to earn marked down earnings? It may not be the case that we started pencilling in 20 percent earnings growth but will downgrades come to an end at the end of this quarter. There will still be a few downgrades but at an aggregate level will we have the confidence that the slate of downgrades that we have had for the last 8-10-12 quarters - that is probably a thing of the past and that is very crucial in putting a nail on the floor for the market because if you get the confidence that earnings have bottomed out, they may not have started accelerating yet but earnings have bottomed out and downgrades have stopped then you can say that at least from an India perspective - whatever happens globally, we do not know, but from India perspective we should have more confidence that we have put a bottom in place from fundamental perspective and then we slowly grind our way back up to 12-15-17 percent earnings that everybody is talking about. I do not think it is given today after looking at the first half of the earning season that we are going to have 15-16 percent earnings growth this year but I am hoping that in the next 20-30 days will all congregate once again and say at least these downgrades are thing of the past.

Latha: The current account numbers - we are in a surplus. Now the Reserve Bank of India (RBI) also releases services data monthly and for April we are in a current account, in a trade surplus itself, not counting private transfers, not counting investment income. With that from January to April we are in a current account surplus. Does that seminally change things for FII investors or you think that is pencilled in?

A: I think it is very important point because the currency plays a very important part in determining an emerging market outlook even for the equity and the bond market for any investor. The fact that we have been running a current surplus for so many months now is something which will not have gone unnoticed at all. The picture is only complicated by the fact that FII investors do not have a clear view of where this emerging market cookie is heading because on one hand you have an equity performance outlook and on another hand you have a currency outlook. Sometimes they move in different directions though not very often. So I think FIIs are looking at the situation with great optimism about the currency. However, you need to take into account that the dollar index is quietly crept back, the lows of '91-'92, but it has worked its way back to '94-'95 once again and if after such a strong emerging market performance across the board, you are going to have an EM pullback then that might weigh on the currency as well.

Therefore, the situation is not clear but from a medium-term perspective it is excellent news for the rupee. It's not to say that tomorrow the rupee will go to 65/USD but eventually this will have great bearing on what the rupee does versus other emerging market currencies in the basket. However, just in the near term, everybody is trying to figure out how deep this emerging market pullback, which a lot of people are talking about, will be and on that also partially rest the outlook of the currency.      

Latha: Even when the dollar went to 91 or 92 or now that it is up at 94.7, the rupee hasn't even touched 67. It is so much able to bear the strength in the dollar, not giving away anything at all. It has been an extremely strong currency and if you add to this, what you say about earnings downgrade and this quarter then we have fairly the ingredients of outperformance you think?

A: India is behaving like a classic defensive stock compared to other emerging markets. We are like Asian Paints right now in the global perspective. We did not rally when the emerging market rallied so hard. Look at the performances of Brazil, Russia, those kinds of markets - they were like high beta stocks. We did not do that much. We did 10-11 percent. On the pullbacks, China fell 11 percent from April top. We are down 2 percent. I like in to something like an Asian Paints because India is showing classic defensive trades in the context of what emerging markets have done over the last few weeks. So that price action is very encouraging and there is no question about that but whether we will relatively outperform other markets, we will have to see that.

Sonia: The index will not rise if banks do not give it leadership. How do you approach that space both private and PSU?

A: It's a complicated one but my sense is that banks are in the process of bottoming out. How long that process takes, is difficult to call because you will recall that in one large private sector bank and one large public sector bank, it appeared that last quarter they have taken a lot of the punches and they were putting their hands up and saying we have disclosed most of what we had to disclose, without specifically saying that, at least that was the market's takeaway and then this quarter again you are presented with a very large hit albeit there are positive things like recoveries which are also happening at the same time. So to time this and say we have seen the worst and no further, I think is a leap of faith because banks are continuously coming out with bad news.

However, this had to happen, this phase had to happen. You couldn't have bottomed out without this phase. So we are in a bottoming out phase even for the once which are declaring lots of bad news like ICICI Bank and Bank of Baroda. It is just a matter of whether they will continue to do so for another two or three quarters and you have to be patient through this phase. I think it will call for some volatility, not in the HDFC Banks, the Kotaks and the IndusInd Banks because they look like they are in a different zone or in different universe at this point in time but the ones which are the ICICIs of the world maybe even Axis of the world and these Bank of Barodas and SBIs, they will wade through two-three quarters of bad news flow. So this could be the bottoming out phase, this could be the phase where you use the bad news to buy and then eventually maybe by the end of this calendar year you say that most disclosures are done, everything is out in the open and these stocks start to move up once again. I think this is a phase of volatility, some people will buy, some people will abandon it on the quarterly numbers but it is an essential part of bottoming out process of a sector which has been a drag on this market for quite a long time now.  

Latha: What is your assessment on two year of Modi Government?

A: The market action has told you everything. We are flat 5-6 percent in rupee terms and negative 6-7 percent in dollar terms for the FIIs. It has been two years of disappointment from a market perspective because the market over expected and we haven't seen that much come in. If you talk to brokers on the street, they will tell you that the real action is happening on the ground and you will see the rewards later. My view has been consistent before the election result and even after it that we are over analysing and over attributing the impact of this on stock market performance going forward. The stock market will do its own thing, it will depend on earnings primarily, it will depend on the global backdrop and of course the technical factors like liquidity. I think the governments play a role sometimes in equity market performance but the people on the street give it undue importance. These things will come and go and in the long-term they will average out. India is bigger, at least Indian equity market performance and earnings performance is bigger than what a few politicians do in Delhi.