Given the spate of earnings downgrade the market has witnessed in the past, it will likely be difficult for it to move significantly higher in the near term, according to Anant Shirgaonkar, Head - India Equities at UBS Securities.
In an interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar, he said emerging markets may be volatile in the near term. "We have a December target for Nifty at 8,600," he said.
He added that investors have been focusing on quality names. "The preference is for cyclicals with low debts and good managements."
Below is the transcript of the interview on CNBC-TV18.
Latha: How much should we worry about Greece; will it be for at least for India so far out in the penumbra of trouble that it would be only minor jitters?
A: I think what we are seeing right now is a little bit of politics which is playing out between European Union (EU) and Greece. However, what eventually we believe is that as time progresses we will arrive at a solution which would put the market at ease because that is in the interest of every single participant.
However, from now till that moment, we will see volatility in the emerging markets particularly on the yield side and on the equity market side and I think India will not be able to escape that. So, I guess volatility is something that we will have to live with till we see some kind of a solution to this issue.
Reema: When we spoke to you last time I remember the Nifty was at that 8,000 level and the fear was that perhaps much lower levels are in store and that time you responded by saying that investors are quite happy with this correction because you get some midcaps at very attractive valuations. In your conversation with various investors which were the themes which looked attractive in this recent correction and one should look at?
A: We spoke last around the midcap conference and that was the feedback that we were getting from the investors at that point in time. We have been following up with investors ever since and the feedback is still that the interest in India still continues to remain high especially among quality names, quality managements in various fields.
So, financials is something that is still almost everybody’s favourite and among that private financials are the most preferred ones over public financials. The theme over there seems to be that over a multiyear period, private financials will continue to gain market share from their PSU counterparts.
The second theme that a lot of people were interested about was the rate cuts which would play out over the next 12-18 months. We expect about 75 basis points cut in rates from Reserve Bank of India (RBI) over the remainder part of the year. Therefore, wholesale funded financials is something that was of interest.
The third theme was consumer related names because some of these names have a secular growth story in India. Therefore the challenge is to find quality names at reasonable valuations and that is where the investors are spending a lot of time on.
Fourthly, playing up on the cyclical theme and preference again over here seems to be more quality names which could survive through the down cycle and actually be poised to take advantage of the economic upswing. So, quality cyclicals, low debt, good management is something that a lot of foreign investors are interested in spotting.
Latha: Your strategy paper indicated that you are working with only a 10 percent earnings growth in the current year. Is there an upside risk at all going by the recent say rains and capital goods companies telling us that they have orders. BHEL landing up with a Rs 17,000 crore order from Telangana, Larsen & Toubro's AM Naik recently said that the order cycle is turning and their own books are looking better in terms of order books. Anything at all in the ambience to give you an upside risk to 10 percent?
A: I think quite the opposite; I agree with you that there are some green shoots in terms of monsoon and some companies talking about order flows, but most of these order flows will take some time to start reflecting into the quarterly numbers. More importantly what we are worried about is that the consensus numbers on a bottom-up basis haven’t factored in the sort of delay in recovery and they are still standing at about 18-20 percent growth for FY16.
We think there is chance over the next two quarters that this consensus earnings comes off from the 18-20 percent level closer to over 10 percent levels. I think that is the challenge that the markets will face because it is very difficult for the market to grind higher in the face of continuous earnings downgrade. So, that is the scenario that we look at over the next few quarters.
Reema: Because we are likely to see earnings downgrades in the next two quarters from 18 percent all the way down to perhaps 10 percent going by the UBS’s estimates, what could be the downside for the market? You had earlier indicated that your upside is up to 8,000 level on the Nifty, what about the downside?
A: I think the market will sort of remain range bound. I don’t think there will be significant downside but what this will do is sort of cap the upside. Hence our target for December isn’t much high, it is about 8,600 precisely because we believe that the upside gets capped.
On the downside, a lot of funds are looking at taking advantage of this kind of a tepid scenario to buy into quality stocks and make meaningful position. So, I think there would be long-term oriented foreign institutional investor (FIIs) and domestic institutional investors (DIIs) who would want to take advantage of this tepid news flow, tepid numbers which may flow through and want to do some bottom fishing at lower levels around the next two quarters. So, upside gets capped for sure.
Latha: Nifty has got some surprise support from Reliance Industries as well as oil and gas, any views?
A: Oil and gas we are positive on as a sector simply because we think two things are happening there. One is on the PSU side, the government has taken a lot of steps to sort out the subsidy issue. We have sort of come to parity on petrol and diesel and the minister has gone on record saying the next thing to tackle is going to be kerosene. So, I think we are pretty happy with the progress on that front and that seems to be structural in our view. So, on that front we are encouraged.
On the private side, we have made some progress in terms of the government moving towards gas pricing and therefore there are hopes that as there is more clarity emerging on that front we would see gas volumes starting to come back which might help some of the private names as well. So, oil and gas is a space is under owned and structurally seems like it is moving in the right direction.
Reema: Which are the key sectors where currently the consensus earnings expectations are quite high and we are likely to see downgrades?
A: I think cap goods, infrastructure, some financials and some consumer discretionary these are some of the spaces wherein there was a lot of recovery hope which was built in and there could be some disappointment as the recovery looks like it is getting delayed. So, those are the sectors which could see some earnings downgrades.
Reema: When you say financials you mean PSU banks?
A: PSU banks I think on both fronts, on NPA front I am not sure we have seen the worst on that front but even on private financials there is scope for the loan growth to get tempered off over the next two quarters and that leading to the profit growth being tempered.
Latha: On a year-to-date basis there have been couple of FMCG companies that have rendered a very good account of themselves, Marico for instance, more tepid play has been Dabur, Hindustan Unilever (HUL) has been a very good performer lately. What is the story in the FMCG space? The consumer maybe tepid but there could still be individual outstanding stock performances.
A: Consumer space still is among the preferred pick among investors especially on the consumer staples side because that is where the growth continues to show promise over the next 5-10 years. However, more importantly, our view over there is that we believe that the rural slowdown despite the monsoons could be as a negative surprise for this space. We believe that the rural incomes actually grow over the last five years odd because of external stimulus from the government.
If that is sort of slowed down in the current government we would imagine that the rural demand and rural consumption would be a shade lower than what we have seen in the past. And that where some of these consumer staple names may come under pressure as well. So valuations is one but I guess there could be chance that the demand scope for some of these consumer staples could be a bit disappointing. I think we will have to be stock specific there but by and large we are less positive on the consumption space.
Reema: In one of your notes it is indicated that investors are resistant to your views of sharply lower interest rates ahead. When could we see the first interest rate according to UBS and will that help in posing any upside to your 8,600 level on the Nifty or is it already baked in into the target price?
A: We have been forecasting about 75 basis points cut for the remainder part of FY16 and that is what we have built into our estimates. I think the 8,600 more comes in from the pending earnings downgrade which we expect the street to take effect over the next two or three quarters. I think the earnings, the rate cuts would be a positive but the market will still have to contend with the earnings downgrades.
Latha: If it is 8,600 for the year-end and repo rate of 6.5 percent then isn’t fixed income the buy now, G-secs or maybe corporate bonds?
A: Yes absolutely. I think a better leverage play on that could be a wholesale funded financial institution because they would tend to benefit a lot more from the equity side. So, that is what one of our themes for financial space has been.
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