Market may see double-digit correction from here: Gubbi

The GST Bill in its current shape is not very meaningful, he added.

Below is the transcript of Pramod Gubbi’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.Latha: First up the index level itself do you think there are more depths to plumb, crude is rising and results are nothing great to write home about?A: Yes, like I mentioned the last time as well if you look at the horizon there is hardly and positive catalyst for the index on the markets in general to go up from here and in the end there could be a number of negative catalyst both global and local. We have been arguing that the demand situation particularly in the domestic economy remains weak and given the number of initiatives taken by the government which is definitely positive from a long term perspective, the short term effects should be keeping this demand suppressed at least for a while. To that extent both macro indicators as well as corporate profitability as we have seen in this earnings season itself should remain a drag on the markets in general. In the global markets there are just too many moving parts and anything can surprise on the negative which could add to the negative. So, in short we do see more downside to the market from these levels.

Sonia: The market has already corrected 10 percent from its all time highs. From here on do you think it would be a more time wise correction that we will have to endure or do you expect to see some more price wise correction in the market in the second half of the year?

A: Difficult to call. The latter could have higher chances. Remember about few months ago me sitting here and discussing if you were a global investor looking around different asset classes and different markets to invest in India clearly stood out today that is not the case. Clearly expectations about India has been pulled back and at the same time there are few other alternatives that have emerged. So, the real catalyst could be money rotating out of India into some of these asset classes or other markets within equity markets in general. We have already seen the beginning of that happening into China, Korea and Taiwan and particularly commodity markets are also taking some flows. So to that extent if that continues we could actually see a meaningful downside in absolute terms. At best the scenario A which you painted is more time wise consolidation could happen but very difficult to see upsides from here.

Latha: How bad can it get, does it get to 7500, does it get even worse?

A: In liquidity driven markets that we are in such as now it is very difficult to call absolutely levels. Liquidity comes and goes in a flash and these things can have quite volatile impact. We should be prepared for volatility, whether that is 5-10 percent from here difficult to call the exact level but I won’t be surprised to see a double digit correction even from here.

Latha: I wanted to ask your view on Goods and Services Tax (GST). It will in all probability the amendment bill will go in Lok Sabha but it is unlikely to pass in the Rajya Sabha where it is in all probability going to be referred to a committee. The manner in which everyone is balking at it, if it gets postponed beyond April 2016 if it is looking a little unreachable will that be a big negative for foreign investors?A: It is indeed. We have seen a sheer lack of legislative reform particularly the meaningful ones like the GST and land acquisition. The only hope from the foreign investors point was although there is realisation that the current shape of the GST bill is not really meaningful in terms of what it was envisaged but at least it would have been a step in the right direction paving the way for future changes. Any postponement of that will definitely be a disappointment. I don’t think there is any doubt about that. 

Sonia: You said you won’t be surprised if you see a double digit correction from here. On a valuation parameter at what point do you think this market will become attractively valued from the current 18 times forward earnings, how much do you think it could correct to?

A: A double digit correction will be just superb from valuations standpoint for people to come in and pick up some value stocks at very attractive valuations. Remember we have always maintained that the long-term story remains intact. We have still got fantastic companies in India operating, it is just that the current scenario in terms of earnings visibility and the valuations don’t simply stack up together so one of the other two have to move so if valuations correct I would think anywhere between five and ten percent at the market level which will mean that perhaps at the midcaps and the small caps we would see more like a fifteen-twenty percent correction, that should be a really attractive entry point.

Latha: Okay that will be attractive to buy but where do you hide until then, which stocks?

A: We always maintain that-even the concerns on the domestic economy exporters look good. IT and pharma both have had different bouts of correction, IT perhaps a longer and deeper correction, pharma has begun to correct only recently. Both are exposed to the global economy, both have very good companies, very good business models with reasonably good earnings visibility, to that extent they still remain very attractive places to hide. Other than that from the domestic standpoint there are few areas which we maintain where the government is keen to initiate action, roads, railways, defence, mining and power transmission, these remain our favoured areas so despite nothing much happening in terms of intrinsic demand in the economy, the government action should help earnings in these sectors, that should be a good place to invest as well.

Latha: When the auto sales numbers came in for April, after a almost four or five month gap of negative year-on-year (YoY) sales we saw Bajaj Auto reporting higher sales numbers. Likewise Tata Motors passenger vehicles, Maruti very good numbers 30 percent higher and then the theory now is that urban demand is reviving. You buy the theme and if you do, what stocks?A: Within the broader auto category passenger vehicles definitely look much better than the rest even from a long-term perspective given the lower penetration compared to the other two vehicle categories and also even from a competitive intensity standpoint passenger vehicles relatively a benign segment. We have seen foreign entry but that hasn’t done much to market leaders, market leaders continue to maintain that market shares so that in my view is a good place within the broader auto segment however I am not so sure that the urban demand revival is a given. There is an element of statistical uplift given last April wasn’t particularly a great month so YOY numbers for this April have been skewed to that effect but there is no denying the fact that there has been some uplift but on two-wheelers I am not sure given competitive intensity remains quite stringent given Honda and TVS both have recovered, so the market leaders’ market shares are under attack. So passenger cars over two-wheelers.