Last Updated : Dec 21, 2016 04:47 PM IST | Source: CNBC-TV18

Market may correct 10-15% in 3-6 months if DIIs sell: Ambit

Saurabh Mukherjea of Ambit Capital shook the world when he said it is a contracting gross domestic product (GDP) for the current year and now he says the evidence that emerged in the last few days validates the point that the economy is under pressure.

Saurabh Mukherjea of Ambit Capital shook the world when he said it is  contracting gross domestic product (GDP) for the current year and now he says the evidence that emerged in the last few days validates the point that the economy is under pressure.

Speaking to CNBC-TV18 he said, the economy will barely grow in the second half of this fiscal year and our FY18 growth estimate of 5.8 percent looks to be under pressure.

He said that there is pressure on banking and financial stocks and all near-term targets on the market have been scrapped.

The situation is tricky for foreign institutional investors (FIIs) after the election of Donanld Trump as US president.

Mukherjea says FII outflows will continue to present a bad picture for the Indian market and market may correct by 10-15 percent in 3-6 months if domestic institutional investors (DIIs) sell off.

He says the December month is turning out to be the worst as large amount of old notes are now gone.

The only silver lining in these dark clouds seems to be the consumer discretionary space as Mukherjea is slightly optimistic on that.

The major concern remains on the lending stocks and investment-linked themes like capital goods will remain vulnerable in mid to short-term, he said.

He further said that the market has less downside than economy as it is being supported by domestic flows.

It is good time to buy high quality stocks with impeccable performance, he said.

Below is the verbatim transcript of Saurabh Mukherjea’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: You shook the world when you said it is a contracting gross domestic product (GDP) for the current year. You still stick by it after seeing 40 days of demonetisation?

A: In fact I think all the more so right. I think all the evidence that has emerged in the last three to four weeks is that economy genuinely is under pressure. In fact we published a note this morning saying that whilst the second half of the current fiscal and the economy will barely grow, even our FY18 growth estimate of 5.8 percent, looks to be under pressure.

The main change in our thinking in the last month has been that investment in next fiscal comes under severe pressure. That is not something we had quite reckoned a month ago.

Latha: I will just tell you what the counter to this was that there is a lot of pain in rural India but that is largely in the informal sector which does not get counted in the GDP. For instance, agri gets counted but, dairy, chicken, poultry don’t get counted and they have suffered but net sown area is good, so, agri output into GDP will be intact. That was the argument that came from those who didn’t cut GDP?

A: Agri is only 15 percent of GDP. We would love it to be more but it is what it is. BFSI, big sector, a clear pressure on NIMs and as we know, credit outstanding is shrinking in the country. So, if you take the big sectors of the country, auto, BFSI and construction, 11 percent of GDP is construction and real estate and clearly activity there is shrinking.

So, I was a little perplexed as to why people were so peeved when we said that the economy would shrink in the current quarter.

Latha: Power consumption is it was in October.

A: So the elements of the economy will hold up. Airline passenger growth has also been very healthy. However, large elements of the economy are coming under pressure and that is even more evident in December actually than in November. November there was still some usage of old currency but as the old currency usage completely dies out, I think December is turning out to be even worse month than November.

So, if you ask me the big change in our thinking is as the months go by, the situation is actually worsening, not improving.

Sonia: In terms of a market movement, how much worsening do you see over the next three to six months because of the factors that you alluded to, the way banks are selling off?

A: The combination of circumstances which makes the current situation very tricky especially for FIIs is the Trump election. The fact that you have an President elect who is promising a major fiscal stimulus in February is obviously making global investors very excited about America. So, you have a slowing economy in India, potentially with more slowing growth to come, we have a banking sector which is a third of your stock market cap and the other side of the world you have the world’s largest economy now accelerating.

I think the FII outflows piece continues. Combining that with the pressure on the economy and on BFSI stocks, I think the FII outflows continue apace which creates a relative difficult picture for the market over a three to six month horizon.

Sonia: What would your December 2017 year-end target be for the Sensex?

A: In our note on November 18, we scrapped all our near-term targets because you have so little visibility on earnings growth in the economy over the next three to six months other than the fact that things are slowing, there is very little visibility. My reckoning is, if DII inflows which are holding the market up, if DII inflows conk-off, then 10-15 percent downside on the market itself over the next three to six months is the most likely scenario.

At the moment DIIs are absolutely central to the Indian market holding up. If that support goes away, we have got meaningful market downside in the near term.

Latha: The India Cements management yesterday told us they didn’t notice any fall. Maruti Suzuki, even the numbers didn’t show much of a fall.

A: You are seeing several management teams saying November is held up and several prominent companies, well respected, highly regarded companies saying November is held up. However, when we do our channel checks, it is reasonable clear that November held up because of the use of old currency to either stuff the channel or use old currency to example pay down NPAs or pay down debts. In December, with the old currency gone out of the system, the downside impact to the economy is becoming more evident.

Latha: What are your thoughts, is the small bank, MFI sector in particular problems?

A: Leaving the specifics of demonetisation aside, I think we have historically seen this in India repeatedly and in several other countries that if you lend to low income segments, you are prone to political capture because the politician obviously has a vested interest in playing the populist card and it has happened repeatedly. It has happened in Mexico, it has happened in Eastern Europe, so, in that regard, you have probably seen Andhra Pradesh in India in the past, so, at one level I suppose this has got very little to do with demonetisation. What demonetisation gives the politician is the premise to go out there and create a notion that default is a safe option.

So, as the gentlemen said, the RBIs 60 day window has been misinterpreted to the detriment of the lenders. I think to be fair, it is a more generalised situation, it is not stock specific at the moment, where borrowers are struggling to repay. As I said, November was exceptionally good because borrowers used old currency to keep up where they could but with old currency now broadly gone, I think the trouble now accentuates for lenders of all shapes and sizes; I don’t think it is a particularly size specific issue. Remember credit outstanding in the country is shrinking, so, even if your NPA problems don’t come through with a lower loan book, you P&L starts looking less pretty.

Sonia: You were saying that there could be a 10-15 percent downside in this market if the DIIs let up. Which are the pockets or which are the sectors that you would completely avoid now?

A: The concern levels would be the highest for the lending stocks because remember they are a big part of our market, we have got several prominent lenders at elevated price to book multiples. By definition, lenders are geared 10:1, many of the lenders are also asset liability mismatch. They are borrowing short term in the wholesale market to lend long term in the retail market. So, in typically such situations, lenders are the most vulnerable lot.

The second area I would think would be the investment piece. As I said, that if I had to sort of look at one change in our thinking between a month ago and now, it is that growing realisation that the investment piece is actually very vulnerable over the next couple of years. So, capital goods related plays become the next layer of I think pressure.

Now, fortunately the valuations are not particularly rich there and the third layer where we have not completely given up hope as yet is consumer discretionary because if the pain lasts, then discretionary consumption becomes a casualty. Let us see how the next three to four months play out on that before we make further calls on the consumer discretionary spends.

Latha: I want your calls on where the Nifty will head, where do you see it 12 months down the line? I am asking you in the backdrop that you said DIIs is the pillar now supporting and where else do you put money? As we were discussing yesterday, fixed deposit (FD) is giving you 4.5 percent post tax.

A: That is right and the FD rates are going down almost by the passing week. So, if you ask me why when I wrote that November 18 note with my colleagues, why were we less bearish on the market than on the economy, is exactly this. The reason we believe the market has less downside than the economy does is, the domestic flows will be supporting it. However, at the same time, we also have to realise that investors are rationale. Domestic investors are rationale and if they believe that the market has downside, they will still take the 4-5 percent from their FD rather than lose money here.

So, short term investing for anybody is not a particularly clever idea and hence taking a longer term view on the stock market -- let us hope that the domestic investor takes the long view and continues supporting the stock market because the market becomes the one source of safe haven in a difficult economy.

Latha: For those who buy their own stocks, where should they hide?

A: I would reiterate the Ambit mantra, good and clean. Focus on sector leaders, franchise leaders, strong balance sheest, strong cash flows. If you ever need to I invest in high quality stocks with impeccable financial strength, it is today that you need to do follow that mantra.

Latha: If you wrote your book again, would you choose the same seven stocks?

A: We will probably have to have a longer discussion on that. As I said, the BFSI, the banking and financial services sector does look very vulnerable today.
First Published on Dec 21, 2016 11:12 am