Much of the near term positive news have already been discounted, feels Jitendra Sriram, Managing Director and Head of Research, HSBC India, who is neutral on India. In an interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy, he says China and Indonesia appear more attractive in comparison to India.
Sriram is turning positive on domestic industrials and is selective on IT and tech plays. In the IT space, he likes TCS.
In the industrials space, Voltas is among his top buys. He says the company will be a direct beneficiary of a pick up in domestic, Middle East order inflows.
On oil marketing companies, Sriram says LPG is a bigger headache for the companies than diesel and any fall in under recoveries will be contingent on policy action to reduce LPG subsidies.
He says it will be another two to three quarters before corporate earnings start looking up. On the positive side, he says there are signs of a pick up in infra capex.
Below is the transcript of Jitendra Sriram’s interview to CNBC-TV18’s Latha Venkatesh and Sonia ShenoyLatha: Markets in a very interesting position where you want to know whether all the good news is factored in or whether you want to be brave and factor in future good news. Where do you stand, you think this is a buy on every dip? What is your 12 month target for this market?A: Into the year end our formal target is about 3 percent upside. So it goes back to saying that probably a lot of the good news is probably discounted for the near term. Long-term is of course another story in a sense that we do see the earnings growth starting to perk up a little. The Q1 numbers itself shows at least that you are seeing growth move in from that 10-12 percent kind of band to probably around 14-15 percent kind of range now. The other heartening factor about markets has also been that this time around after a rally long time I am seeing that the broader indices BSE 200, BSE 500 for example they have been showing a slightly more resilient or higher growth then the frontline names. So it shows the pickup is more broad based, it is more pervasive now. So I am definitely constructive but near term a lot of the good news is getting priced in right now. Sonia: Last time you had indicated that you are underweight on India. Since then would you change your stance because so many things on the ground have improved, crude prices have fallen significantly, that will actually help rein in the fiscal deficit as well. Would you change your stance based on the macro improvement?A: Yes we already changed it post the election verdict so we are neutral on India at this point of time. When we had done the change we are forecasting somewhere in the region of 7-8 percent upside for the markets into the year end. Obviously the recent move in market now has brought down the expectation to about 3 percent as I mentioned earlier. That is the year end target because we are more homogeneous with what is prevalent in rest of the markets at this juncture. So within Asia we are probably somewhere in the middle among all the eight-nine countries that we track. We are slightly more constructive right now on China, Indonesia more than India at this juncture.
Latha: What exactly have you factored in in terms of crude gains for the oil sector itself, are you still very constructive on that sector. We got the Goldman Sachs report which gives target of double their current price levels. Where do you stand on this sector, what are your favourite picks?A: That is an interesting one because energy sector I fully understand the fact that softening crude and what we have seen in the past couple of weeks should be really good for fundamentals part of it. Having said that there are three things that one needs to take care about and it brings me back to our recommendation list here in terms of the names. What has happened is that although we have been constructive on ONGC and various other names here for a good part of it, right now what has happened is that for the incremental triggers you need three catalysts. One is the fact that you need to see how that drop in oil is going to benefit the two big stake holders. One being the Government of India in terms of its fisc, second being the oil upstream companies in terms of the under recoveries. Now the issue is that up till now a large part of the benefit has been taken by the government in terms of a lower under recovery. So it is definitely good news for macro but whether it filters to the corporate earnings is something we still need to see. So may be the next leg of improvement is where you will see that growth come through for the oil sector as such.The second issue has been in terms of the recovery construct itself. Earlier diesel was the bulwark of that under recovery and thankfully that is now bought down to a very manageable level both by price hikes and secondly by the softening of crude. On this issue I would definitely say that we need some more positive constructive action on the subsidized areas of LPG and kerosene because unlike diesel of the remaining under recovery almost 80-85 percent now comes from LPG. So diesel is no more the pain point, it is going to be LPG. We need some corrective measures at this point of time to make sure that reform momentum continues. A large part of falling under recovery and that benefitting in turn the upstream majors will be contingent upon LPG price action going forward. The third issue is resolution of the gas price hike where the government has already indicated that they want to bring in new price effective October 1. Some clarity on that will definitely help going forward. So these are the three things one needs for some more leg-up on this sector from here on.
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MC query: Is this a good time to enter defensives like IT and pharma stocks?A: From a relative context I would definitely say that we are getting more positive on the industrials and the local economy plays at this juncture. Main reason being that the last four-five years performance has not been with them so obviously ratings have fallen way below what historical levels were, earnings and margins are much more muted, you could see much more uplift there. The second part of it, the interesting statistic is that right since the election verdict IT has been one of the strong performers in this market despite the intervening period seeing a cut in guidance for cognizant and despite that event we have actually seen technology doing quite well. Probably a lot has to do with the fact that where market was seeing currency at levels of 58-59/USD we have probably moved up to about 61/USD mark right now. So that has obviously benefitted the tech sector in overall terms.We are more selective on tech at this point of time, I won't say that it is a case of broad based buying, we still like some of the names like Tata Consultancy Services (TCS) but I don't think it is a case of getting constructive about the whole sector at this point of time.
Sonia: You have had lot of recommendations in the auto sector, what are the stocks that you would still hold on to after the run-up?A: Our top pick at this point of time in the auto sector is Mahindra & Mahindra (M&M), by and large we are constructive on the whole space because we have had two three years of relatively muted growth both in passenger cars. Also in terms of the high cost of ownership because of elevated interest rates which may not turn in the near term but may be second half onwards you could see some easing in rates come through there. These would help in terms of fueling demand growth so that is an area that we clearly like. So auto is something that we are definitely getting constructive about but in terms of the ranking of names I would still be slightly more positive on capex oriented plays rather than being more in the passenger segment because passenger had a good run-up performance behind it. We are constructive on Tata Motors as well.
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