Liquidity is king in short-term but earnings worrying: Udayan

Speaking to CNBC-TV18 Consulting Editor Udayan Mukherjee believes that Axis Bank's poor numbers have been muted. He believes that in a different kind of a set-up, the bank would have fallen badly. The bank should trade below Rs 500, he said, adding that there are wrinkles in the bank and HDFC Bank's numbers. He believes liquidity is king and traders will be best served by focussing on it. Earnings will have to demonstrate some kind of power. "Otherwise the near-term strength will fail," he said. This earnings season, the IT numbers have been poor, he said. "Last quarter was good and it had raised hopes in terms of earnings." The market expectations of earnings have been in the range of 16-17 percent.
If private banks and IT have to be marked down in earnings, then 16 percent eranings growth is difficult, he said.

He also spoke about the Cairn-Vedanta merger terms saying that there is an arbitrage opportunity. "Most of the upside may have played out already," he said.The market had an inkling of the merger terms. Now, it becomes a play on crude prices and zinc, he said. "It is a sell on news that is happening now. It doesn't happen in a firm bullish groove."Talking about global news, he said that trigger will be the Fed meeting slated for this meet. He sees the Nifty at about 8700 this week. "It is a risk-on, technicals play," he said. It is not instructive to talk about macro headwinds now, he added. "Focus on cash," he said.Below is the verbatim transcript of Udayan Mukherjee’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18..Sonia: After a long time we are seeing some increased stressed loan formation in Axis Bank. How do you think the market will react to that and do you see the spirit of the private sector banking sector get dampened because of this?A: It is technicals versus fundamentals out here. Had it been a different kind of a set up with not so much of liquidity sloshing around, you have seen Rs 4,000 crore of Foreign Institutional Investors (FII) inflows last week that tells you that there is a serious amount of cash commitment in the market and therefore the reaction to Axis Bank's poor number and they are unequivocally poor has been fairly muted. In a different kind of a market set up Axis Bank might have fallen 10-15 percent very quickly after those numbers. So, that holds true for most of the market.The fact that we are sort of buffeted by fairly significant liquidity at this point in time but some of the fundamental numbers which have come in the first 10 days of the earnings season actually have been fairly disappointing. Axis Bank itself every quarter we speak about how private banks have ring fenced the problem and we have brokerage reports coming out and saying maybe the stock could double because the worst of the problem is behind us and then out comes a quarter where they actually add significantly to the slippages. Now, I don't buy this argument that it was an expected problem because if it was an expected problem it was an spoken you would have spoken much more about it or heard much more about it but what we hear is actually from private banking that the problem is behind them and therefore the stock should get rerated and this quarter's numbers from Axis flies in the face of that.So, as you guys were discussing earlier it is not just Axis Bank there are wrinkles in the Kotaks and HDFC Banks of the world too in this quarter's numbers and this is about your strongest set of companies in the system. The Kotaks and HDFC Banks and even Axis Bank more than ICICI Bank. So, disappointing set of numbers. Axis deserves to now trade at less than two times book after these numbers with earnings being marked down quite significantly I imagine. So, I don't think it deserves 2.2 times book, it should trade below Rs 500 for sure. Latha: As you say there is this tussle between liquidity and valuations that is being played in the macro markets itself. How does a trader approach a situation like this when individual news still tends to be bad but you can't argue against liquidity? A: The trader has to follow liquidity. In the near term that is king. All of us have seen it many times before. You can cry till the cows come home about wrinkles in fundamentals and valuations but in the near term cash will always win over. With an accent on in the near term - I keep saying this - eventually earnings will have to demonstrate some kind of power otherwise this near term strength will fail. That is the way of the market. But as a trader if you are looking at the screen and watching those FII numbers into emerging markets and into India there is no point fretting about what is happening with valuations or any disappointment with earnings. This market or the screen has not taken a single false step over the last few weeks, last week included. So, the trader will probably be best served by ignoring all of that and focussing on liquidity for now.Sonia: But the question is where the leadership can come from next. First, it was the IT sector that disappointed in earnings. Now it is some of the marquee private sector banks. On IT particularly, how did you react to the numbers?A: They were very poor. That is the problem, last quarter was so good, it raised so much hopes in terms of earnings, I got very hopeful too, I hope it is not - maybe by the end of this earnings season you will also talk in hopeful tones again but the start has been very poor. IT plus private banking is about 40 percent of the market and you have not had good news from that. Typically it is the other way around. IT and private banks actually start off the season well and you say, oh, very nice season and then towards the end you see some of the skeletons come out. This time the season has not started well. There are seven or eight disappointments in the first 10-12 numbers which have come out from the Nifty companies.IT has been disappointing and it is basically saying if you analyse what the large companies are saying out there, they are saying that they will grow this year by no more than 10-12 percent with some kind of slippage in margins. That does not make for very good news in terms of earnings growth that you should be pencilling in. All of us are expecting 16-17 percent earnings growth this year and if IT has to be marked down in terms of earnings and if private banks have to be marked down in terms of earnings then it is a bit of a stretch to get to 16-17 percent earnings.So, IT there is no case for upward rerating. Right now if you have to have IT in your portfolio you have to avoid the weaker players in the transition because all these companies are trying to transit into more digital oriented businesses and some of them will make the transition over the next four to six quarters but during this phase the most pain will be felt by the weaker companies in the last year which is your Wipro's of the world. In the past you have seen that in transition phases you don't do very well and you want to stay out of midcap IT companies which have vanilla commodity kind of businesses. This might be painful year for them.Sonia: How did you react to the other news flow which is the Cairn-Vedanta deal and individually on both those stocks the rally has been very good up until now. But do you see further upsides?A: Difficult, there might be a little bit of arbitrage which Cairn might reflect later because of the sweetening of the deal. So, there could be some arbitrage upside there but that is a pure trading opportunity. As you said most of the upside might have played out already. Lot of people in the market probably knew that the sweetening of the deal is going to happen because of the sheer price performance that we have seen in Vedanta. The stock was Rs 60 in February and now it is Rs 180 or Rs 170. So, the stock has trebled. So, you can't tell me that this market did not have some inkling of this kind of a deal happening. So, the price upside has taken care of a lot of the good news which was expected to come in on Vedanta. Now, it becomes a pure play on two things, crude oil prices and zinc prices and that is the best way to look at Vedanta when crude goes up or prices stabilise globally or go up you will find that Vedanta is performing.I know a lot has been said about how it helps their balance sheet now with more cash coming in or access to cash coming in all of that might well be true. But Rs 170-180 captures most of the upside and that has been another significant thing about this market and it is perhaps the only mild wrinkle on the screen which one can see which is otherwise displaying very bullish tones for a trader. It is that most of the stocks that are actually not going up after the news is announced you see today Cairn and Vedanta actually not moving higher post the announcement of the news. You saw the public sector undertaking (PSU) banks slipping after the announcement of recapitalisation and I hope that does not happen if Goods and Services Tax (GST) announcement comes through as well. It is a bit of sell on news which is happening after good news coming in and that typically does not happen in a very firm bullish groove which the screen is suggesting at this point in time. So, while it is true that the market is dispensing with bad news with greater ease because of the liquidity this aspect of stocks actually coming off on good news is a little worrisome.More to follow..