Mkt won't fall more than 5%; like CV, cement cos: JP Morgan

Latha: First up, the big question that worries all investors and traders. Have we much more in terms of depths to plumb in the near term?

A: I wouldn’t rule out another five percent or so but I don’t think there is room for downside beyond that.

Latha: What makes you so confident? After all we have heard ad nauseam complaints about Minimum Alternate Tax (MAT) being a huge problem, practically no growth on the ground if you looked at the earnings as well global picture. JP Morgan told us that India has lost it emerging market (EM) star status.

A: It has but that is a very temporary phenomena. All of last year we were the poster boy of EMs and part of it was because we had a much improved policy environment but part of it was also because there was lack of choice within EMs and now some choices is coming through in EMs which is the reason we have probably become a bit of sideshow, but structurally we don’t see any other market which has the same potential as India does particularly on a three year basis.

Ekta: If you had to read how the government has performed in its first year how would you rate it and what were the key things you were looking out for which came through and which didn’t come through?

A: They have done a fairly good job. We must acknowledge and remember that they inherited quite a messy situation. It was a challenging situation both on the global front and the local front and what they have done is they have tried to clear out the mess and put the building blocks in place for growth and this scenario continues for another two to four quarters and by then they will be largely done in terms of putting the building blocks in place and into the next year and beyond i.e. fiscal 17 we should see a very reasonable pick up both in terms of economic growth as well as in terms of earnings growth.

Latha: I have few more near term questions. This volatility or the steep fall that we saw in Indian markets is also a very much a global derivative. Yesterday the US yields went up to 2.36 and then receded to 2.25. Should we see this as the last of volatility and therefore we should worry less about global cues or do you think there is something more coming in terms of global risk off?

A: I wouldn’t rule out some more volatility in global bond markets over their very near future because they are adjusting to two data points really, one is the spike back in global crude oil prices off late and also the realisation that we are probably ending the near end - at least by June-July our house view is that and that is when global liquidity kind of peaks out. So we are just preparing ourselves for that but we don’t see volatility beyond that, we don’t think it is going to be a structural thing going forward.

Latha: Wouldn’t that be a slightly unfortunate mix for Indian equities, the fact that global liquidity peaks off and we lose our star status at that time?

A: I don’t think we have lost our star status on a structural basis. It is a very temporary phenomena and in terms of market performance it will be nice because we have been firing on one cylinder which has been global liquidity but just as that tends to peak out and starts falling off perhaps that is the time when our growth revival sets in and that provides the next phase of boost to equity markets.

Ekta: How did you read the banks earnings this quarter in terms of asset quality because I was looking at the number and a lot of them improved in terms of Gross Non Performing Loan (NPL) but then there were lot of adjustments within the gross NPLs. What was your sense in terms of asset quality?

A: This has been a bit of noisy quarter because as we all know this has been the last quarter where you can really do restructuring and from next quarter onwards that facility is not available to banks. So it has been a reasonably noisy quarter so I wouldn’t read too much into it data per se as far as this quarter is concerned but going forward we will continue to have stress for at least a couple of quarters more on the NPL front because let us face it, the banks are not able to grow their way out of trouble in this cycle and they perhaps have to consolidate their way and that means it is going to take some more time, two to three quarters more in our opinion but a large part of it has already reflected in valuation.

Latha: Wouldn’t that be a slightly unfortunate mix for Indian equities, the fact that global liquidity peaks off and we lose our star status at that time?

A: I don’t think we have lost our star status on a structural basis. It is a very temporary phenomena and in terms of market performance it will be nice because we have been firing on one cylinder which has been global liquidity but just as that tends to peak out and starts falling off perhaps that is the time when our growth revival sets in and that provides the next phase of boost to equity markets.

Ekta: How did you read the banks earnings this quarter in terms of asset quality because I was looking at the number and a lot of them improved in terms of Gross Non Performing Loan (NPL) but then there were lot of adjustments within the gross NPLs. What was your sense in terms of asset quality?

A: This has been a bit of noisy quarter because as we all know this has been the last quarter where you can really do restructuring and from next quarter onwards that facility is not available to banks. So it has been a reasonably noisy quarter so I wouldn’t read too much into it data per se as far as this quarter is concerned but going forward we will continue to have stress for at least a couple of quarters more on the NPL front because let us face it, the banks are not able to grow their way out of trouble in this cycle and they perhaps have to consolidate their way and that means it is going to take some more time, two to three quarters more in our opinion but a large part of it has already reflected in valuation.

Latha: I didn’t want to the sectors just yet but since we have started with banks, let me continue with that argument. Will you have the courage to recommend public sector banks now?

A: Not yet, as far as public sector banks are concerned, the big two or three, probably yes but the others there is still some more time to go before we start recommending them.

_PAGEBREAK_

Latha: Then again to finish of the near term question, inflation numbers, how much comfort does it give you in terms of rate cut expectations and when?

A: As far as rate cuts are concerned our house view is probably there is scope for one more rate cut in the June policy because we are basing this on two sets of guidance that the central bank has provided, one is they have mentioned that they expect inflation to come off seasonally through August but then pick up and reach 5.8 percent by January next year. Our inflation trajectory also is very similar and they have also opined that they would like risk-free real interest rates to remain at 1.5-2 percent. So, you take 5.8 add 1.5 so you are at about 7.25, so we believe there is scope for one more rate cut bar something happening on the oil front or if the monsoon really disappoints.

Latha: And that is not enough to give too much of relief for the public sector banks?

A: Not in the immediate term.

Latha: Now let me come to the slightly more macro question of earnings itself. You just told us that you expect that things will start firing up for India probably in the second half calendar 2015. What is your estimate of earnings in the quarter that is just getting reported? Have you to down grade a lot of earnings and therefore how are FY16 earnings panning out, are they therefore looking more confident because the base is lower or are you downgrading any of their FY16 earnings?

A: As far as fiscal 15 is concerned, we are currently estimating that earnings growth when the quarterly results are out of the way will come in at about 3-4 percent, low single digit. As far as next year is concerned, we are currently at about 13-14 percent, the street is marginally higher at about 16 or 17 percent but I would expect on margin that FY16 earnings growth will be in low double digit because even if you don’t get a volume kicker, what you will definitely get is a margin kicker because of lower input costs and some relief on interest rates.

Latha: But we are not really a margin story, we are a growth story. Is that good enough to attract investments?

A: That is the reason you are seeing the current shake out in the market because if you recall last year, we had this big beta rally between March and June July and what you saw was a lot of the economic sensitive sectors do very well. Subsequently investors have gradually realized that the recovery is going to take some time but that said, they still remain very confident on the India macro story, so the money has not left India, it has just rotated into quality and that has been the theme over the last three four months.

Ekta: How closely are you watching the depreciation that we have seen on the rupee from an equities standpoint and maybe taking sector exposures say IT as well as maybe export oriented stocks?

A: We have been positive and very constructive on both IT and healthcare for more than six months now and that stance has been premised on two things, one is as I mentioned we do want to see earnings visibility because the growth revival is slightly going to take some time and again on the rupee we have always been on the opinion that it does need to have a depreciating bias, not just to support exporters but also to keep domestic industry competitive because you’ll appreciate that even local industrial production has a very meaningful relationship with the value of the rupee and we are already seeing some industries under a lot of stress because of that. To give you an example you look at steel, over the last 14 months steel consumption in India has been flat but domestic production is down 8 percent, imports are up more than 30 percent so we need to keep the currency competitive.

Latha: And therefore are you turning positive at all after this depreciation or do you think this is not enough?

A: It is going to be a gradual process, I don’t think the central bank will allow it to happen in one shot but we do see a gradual depreciating bias and that will be positive.

Latha: Just to finish the argument about stock market levels, you said that you wouldn’t be surprised with a three to four percent fall in the market. We spoke to Sunil on the day of the fall and he is expecting much lower levels, you think it goes to low 7000s or maybe 7500 perhaps?

A: I would think that from a fundamental perspective serious value would start emerging at around 7800 on the Nifty, that said, can it in the near term overshoot and go to 7500 or thereabouts, it can happen but for me a deeper correction beyond say the 7800 levels would largely have to be driven by global issues. I don’t think local issues will push the index much lower than 7800.

Ekta: So when you talk about global issues, what would those global issues or what would be top of mind in terms of cue?

A: Two things to watch out for really in terms of risk factors in the global side, one is a v shaped recovery in oil prices. We have already seen a reasonable bounce but yes if oil were to go beyond USD 70 a barrel and stays there for some time, it definitely adds to pressure on the macro. The other factor as we have discussed in the past again is volatility in global financial markets because let’s face it, apart from dependence on external energy, the other key vulnerability for India has been the dependence on external capital and given that we are going into a phase which is going to be investment heavy, we need that capital to come both in terms of size and in terms of the correct price. So these are the two risk factors really to watch out for from an external perspective.