CNBC-TV18's Udayan Mukherjee says the trend is on the way down with periodic upmoves.
In the near-term, the Nifty can possibly rebound to 7550 and if the global rally continues then 7700 is also a possibility, says CNBC-TV18's Udayan Mukherjee. However, he adds that the current rally is only a relief rally.
The trend, according to him, is on the way down with periodic upmoves.
He believes the market is currently in the 'acceptance' phase. Earlier investors and traders alike were of the view that a China hard landing is unlikely, but now the market is slowly coming to terms with the fact that there are global problems, he explains. So, what the market is seeing right now is a bit of a dead cat bounce, he adds.
Post this phase, comes the assessment phase, when the market will move in a range or a band. But after this phase, the market will either go into an overreaction, which is when prices can fall sharply, or it will be confident that the problems facing the market are manageable and hence consolidate.
As far as earnings go, Mukherjee is still extremely cautious and expects companies such as L&T and Bharti Airtel to post disappointing numbers.
Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: Volatile days is what we have had to deal with. Do you expect this volatility to continue?
A: Right now the market is in a bit of a relief phrase. We got bombed down to about 7,200 level on the Nifty and from there there has been a bit of a relief not just in India but across global markets. I think partly orchestrated by the kind of Central Bank intervention on news that global markets are expecting, I think the Fed will be very dovish tomorrow. The European Central Bank (ECB) is already trying to do something to douse the flames in global markets. I don’t think the Fed and the ECB will be particularly successful in cooling the flames beyond the point.
They have played out their cards. So anything that is coming through by way of relief is going to be temporary but because markets have had such a bad start to the year, phase of some kind of relief was always expected and that is what is playing out right now. I would give it a few more days here as well. So just in the near-term it is conceivable that the Nifty has a bit more of a bounce, maybe goes back to test the two support levels, which held for many months -- the first of it being 7,550 thereabouts. We could be headed there quite soon that is just about 100 points away and if the global rally continues or the global relief continues, you could even go back to that 7,700 kind of level, which was that big support, which the market broke before the waterfall decline. So these are the two markers I am looking at.
I think the higher chances are to go to about 7,550 in the near-term and stop there. Lower chances of it extending to about 7,700 but this in my mind is no more than some kind of a relief rally and in sync with what is going on globally nothing unique to India so you should see it in that context. However, for the next few days particularly in the run up to the expiry and a bit beyond that, you could get some relief here.
Latha: You said that there is a bit of relief but the relief seems to last only for a day. We had monster positive day on the Dow on Friday and then again on Monday, it all got taken away, again on Tuesday it all comes back and we have seen these very volatile gyrations for practically the entire month. Normally how do these volatile spikes end? Do they end with the market getting tired and therefore drifting lower or would they have a catharsis impact and we could probably start some build up?
A: It is a difficult one to answer but I think this kind of manic behaviour is only to be expected in the first phase of what I call the acceptance phase in the market now. October to December, the market was in denial that there is a global problem. Everybody said, no hard landing in China, you guys are getting overwrought for no reason so it will go away, the problem will go away, just give it some time.
Come January, the market is generally now come around to accepting that there is a global problem. In acceptance phases, after the denial has been washed away, markets do get into this kind of a manic phase because you are just grappling around saying, we have a problem on our hands. So you see three-four days of a bad fall then one day of a big relief rally and then eventually the overall downtrend reasserts itself.
Right now, as you correctly pointed out, it seems like the trend is fairly strong on the way down and the rallies are therefore not lasting beyond a day or two. They are in the nature of dead cat bounces or relief rallies rather than anything more durable than that. I think once this acceptance phase comes to an end, this kind of volatility cannot last indefinitely. There might be volatility but not this kind of intense volatility because as you said correctly, it tires out market participants.
What will follow right now is a phase -- from acceptance I think we will move on to an assessment phase in the markets where people say okay we have a problem, let us try and work with some numbers on how big this problem is and the assessment phase typically comes with some lowering of volatility and the market moving into a lower kind of a range and to my mind that range could be 7,200-7,700 for the Nifty. It might last for a few weeks, this is a guess but it could happen that the market says okay, we have quantified the mess and therefore let us try and work with it.
What comes after this kind of a phase where the market might exhibit some ranging behaviour is the more dangerous one or the tricky one to predict because one of two things will happen at the end of this consolidation. Either the markets will go into an overreaction phase admitting that the problem is bigger than it thought earlier in which case you will have a last very sharp drop in prices or it will have a return to confidence phase where the market says, it is not looking like as bad as we thought it would be and therefore the markets will bounce from there and then go into another consolidation phase. So I don’t know which it will be though the stacks are loaded right now towards an overreaction phase from hereon. But that is going far ahead from where we are right now. Let us hope that we get into some kind of a consolidation range at least for a few weeks.
Sonia: One of the bright spots perhaps is the fact that earnings this time has not been as bad as feared. If you look at the largecaps whether it was Infosys, Zee, Asian Paints, Reliance, Kotak Bank, how did you read into the earning season, not just the frontliners but even some of the quality midcaps?
A: I think you will find many more disappointments fortunately over the next couple of weeks. I won't be surprised if you see a few disappointments in the big names this week itself because you have got names like Larsen and Toubro (L&T), ICICI, Bharti coming up. I doubt any of them will have great news for the market.
Also, I was looking at one of the brokerage notes on upgrades versus downgrades at the end of last week. I think downgrades to upgrades is still something like 2:1 or 3:1. I am not sure that the street will upgrade its earnings estimates by the end of this quarter at all. So yes, there have been a couple of bright spots in a few private banks etc, but nothing to suggest that this is the quarter, which is heralding some kind of an earnings turnaround.
I still think we are seeing far more downgrades than upgrades out here. That is the problem that we have at this point in time that compounding the global problem, our own earnings picture is not picking up at all. So the brokers remain quite subdued about what kind of earnings growth we will end up with this year. I still see a lot of people talking about 17-18 percent earnings growth in FY17, don’t know how that will materialise out of thin air. So very cautious on earnings still particularly on the topline, which is indicating that all is not well with the economy.
Latha: I was wondering if you looked at Axis Bank earnings. The particular fear with banks earnings is because the Reserve Bank of India (RBI) has forced them to clean up balance sheets and it will start in slow doses. The Axis Bank numbers, 30 bps more in terms of gross non-performing loans (GNPLs) from 1.38 to 1.68 and they did a lot by way of even revealing to the exchange. On Monday they also said that the quality of remaining exposure to the indebted companies is 70 percent 'A' rated. The point is more disclosures, more than anything else. Net-net what was your view of Axis Bank and therefore what are your fears about ICICI Bank and of course the public sector undertaking (PSU) banks?
A: Different baskets of fish out here and I think that is one thing, which the market will increasingly like to do at the end of this quarter -- to sit back and say the overall compression in valuations in the bank stocks has happened. Now we start to look at which ones might be the better of the lot and which ones are the ones that you want to carry on into 2017, which is where a lot of the ugliness will come into the fore because of this SDR scheme.
So I don’t know whether the RBI is pushing so aggressively. It is talking more aggressively than its policy action with banks. It has also given the banks a fair amount of leash in the amount of time and the way of flexibility that they can come out with their bad news for the stock market.
So I would have expected the RBI to be a bit more harsh on banks given that they have been hiding their bad assets to the investing public for so long but they had given them a window and I think the SDR window will blow up in the bank's face in 2017. I am particularly worried about two banks, ICICI Bank and State Bank of India (SBI) because I think they have hidden a lot of bad news so far and I am not surprised therefore at all that these are the two worst performing bank stocks over the last many weeks.
Other bank stocks have not done that badly but SBI has crumbled to Rs 180 and ICICI Bank went down to Rs 225 because we just look at the list of the SDRs in almost every case. There is either SBI or ICICI Bank which is the lead banker leading a consortium into names like Electrosteel, Visa Steel, Lanco and IVRCL.
You tell me, in 2017 given the state that the world is in, who is going to buy these assets of these couple of banks. I also looked at Axis Bank, I think there is one exposure, which they have probably GOL Offshore which might sting them by Rs 400-500 crore next year.
So if I had to look into banks right now, I would probably sit back and say, valuations having come down to more reasonable levels -- I won't say attractive, maybe there are a couple of banks you can deploy money into but you would not want to be in a lot of the large banks even at this point in time because they will have to share a lot of bad news in 2017. They might hide for another four quarters behind this SDR scheme but the bad news is coming sooner than later.
Sonia: There was a very interesting pair trade that took place in the aviation space on Monday, money moving out of IndiGo and into SpiceJet, how have you read into the volatility in the aviation space and how should one approach it now?
A: I think IndiGo will stabilise. I know it has had a bad fall but that is because how frothy valuations had become and how much the stock had run up after the IPO listing. It has quickly given up quite a bit of that froth and has come down to reasonable levels. I think the first day of listing it went to Rs 850 and we are already at Rs 900. So a little bit more of a slip and you can get IndiGo once again at pretty much the listing price. We are just Rs 50-60 away from the listing price, not the IPO price. So I think IndiGo will stabilise not very much southwards from here.
I am not so alarmed by the fall in IndiGo as much as the kind of volatility or unpredictability of earnings that the aviation space comes with and that is the point which I was making to you on the days of the IndiGo listing as well that this is a space which is almost impossible to call accurately in terms of earnings.
You go back and see in the last few quarters how many analysts have been able to predict an earnings of a Jet or a SpiceJet accurately. I think people are generally way off the mark, sometimes the call is for Rs 250 crore profit and it comes as a Rs 250 crore loss. Even last quarter IndiGo's earnings were more than Rs 600 crore, this quarter suddenly after listing you are down to Rs 120 crore and people are making P/E multiple assumptions of 17-18 on the basis of earnings calculations, which I think have a chance of going completely haywire.
So what worries me more than any slip in this particular quarter is the assurance or predictability of aviation sector earnings going forward because they are so fickle compared to raw material prices and other things. So that makes me a little unsure about the sector but I think it has got a lot of tailwinds at this point in time and it will remain an outperforming sector.
To answer your question, it may be a wise thing to own both IndiGo and SpiceJet just to buffer yourself a little bit if you have to be in the aviation space but be a bit careful about this volatility. There is a lot of ownership scramble, which has happened in the sector after the IPO listing but I hope you don’t have shocks like what you saw with the IndiGo earnings, which rattles people a little bit.
Sonia: For a longer-term investor who has stayed invested in this market, what are the two-three mantras to beat this market volatility in the next three-six months?
A: In longer-term investors should not worry so much about volatility because when people are looking at ideas or stocks from a three-five year perspective, they will have to be vigilant of volatile phases because they could top up on their holdings at more attractive prices but otherwise 10-20 percent volatility is par for the course for longer-term investors.
I think longer-term investors who want to deploy more money should play the waiting game still but be cognisant of the fact that a lot of very interesting names have cooled down on the valuation quite significantly.
I will give you an example, one of the stand out stocks of the last one year has been Britannia. Britannia was a great story but it went very quickly to more than 40 P/E multiple. Now Britannia has corrected 25 percent with the rest of the market and very quickly in a few weeks adjusted its valuation from 40 P/E to 30 P/E. Now 30 is not cheap but it is cheaper than 40 P/E. So you keep watching very patiently and say can I get Britannia if the market mayhem continues at closer to 25-26 P/E. At 25-26 P/E, I would like to buy Britannia because it is still a fabulous story, excellent management, you don’t get that kind of FMCG companies at 25 P/E, you haven’t for the longest time but suddenly the market is giving an opportunity for a very high quality stable earnings name at maybe 30-35 percent off its peak valuation. For longer-term investor, that is exactly the kind of opportunity they would be looking at or should be looking at in this market mayhem.
It is the same thing is happening with a bunch of pharmaceutical names that whole sector expectedly has lost about 25-30 percent of its valuation. Very quickly, some of them have done that because of issues like US FDA but the collateral damage in the pharmaceutical space has been immense. A lot of names which do not have overt US FDA issues have also fallen 35-40 percent in line with the big names like Sun and Dr Reddy's and you want to be looking at -- I will give you an example, Glenmark has come down to 14 P/E from maybe 25-23 P/E. I am not saying go out and buy Glenmark immediately because they have some issues with the rouble but it is an example or illustration of a sector which has corrected a lot, which you cannot write off but you are getting better or more attractive valuations.
I could go on with examples but you need to be careful because some of these stocks are contracting valuations for very good reasons. Names like Jubilant Foodworks, Bata, Page Industries, these have been blue-chip investor favourites but they are correcting because there could be structural changes going in and their business model because of the discontinuities of e-commerce.
So you don’t want to buy everything because stocks have come off 25 percent, you want to let some of them pass but some of them I think are long-term hold candidates which are giving you good entry opportunities.
Latha: No financials will figure in this list that you were speaking about where tall valuations have corrected?
A: Generally, the space looks like it is sticky and I have been somewhat downbeat on this sector for quite some time. However, as I said earlier, if you have to be in that space, be with the blue chips which do not have that asset quality problem at the risk of paying a little extra. And you would note that names like HDFC Bank and Kotak has not corrected that much. Yes Bank has though, so I am wondering what they will disclose when they come out with numbers later this week because the market seems not so sanguine about their asset quality despite assurances from the management.
Non-banking financial companies (NBFC) is another space which is interesting, because HDFC has fallen a lot. The market is feeling less sanguine about LIC Housing as well given a few issues. I am quite surprised by the sharp fall that we have seen in names like Shriram Transport and even L&T Finance. So, the NBFC space is also from a valuation point of view, reaching a space where you could look at a couple of names but from a business point of view, they have a little bit more pain to endure.
So, you are right. This is not the favourite space at this point in time, but from time to time, they will give you trading opportunities, because the way they are falling, they are falling much more than the Nifty in their speed and therefore, there will always be bounce back trading opportunities in them. But for now, generally, the business trend is soft for most of the financials.
Sonia: What about some of these blue-chip auto ancillary names, not because I watch them closely, but names like Bharat Forge have corrected from Rs 1,200 to Rs 850. Motherson has corrected from Rs 400 to Rs 250. At what point do auto ancillaries become good buys as well?
A: From an absolute point of view, some of them have already become quite attractive. But, the problem with Bharat Forge is their exposure to the export markets, makes them vulnerable to -- it is not just a domestic proxy. It is also a global proxy in some sense. You would have seen in past down phases in global markets, sometimes, Bharat Forge goes through extreme pain with some of the European businesses, etc. So, you need to be cognisant of those risks even though valuations have become attractive. It is a very good company for the long-term.
It has created a lot of wealth but the global linkage worries one a little bit. Motherson Sumi has corrected very significantly and it is a good company, it is a big company and it merits some watching at this space. I mean if you had to rank between the two, I would say Motherson Sumi has become more attractive from both a valuation and a business point of view now, compared to Bharat Forge and that is with all due respect to Bharat Forge.
Latha: The typical pre-Budget rally starts sometime in February. This time anything that we should expect or will the markets remain sceptical?
A: I do not think the Budget is on the radar of the market frankly this time around. I think markets have come around to realising that this is not a big event from a market point of view.
The bigger things are playing out outside the market. I think the market is probably not able to move ahead significantly even before he Budget because of valuation issues as well. I just want to take half a minute to tell you that we spoke about some stocks, which have come down to good valuations.
But from an overall market point of view, there is still probably a 10 percent downside based on valuations -- going back to your question on earnings earlier, at the end of this earnings quarter you will probably find that most analysts or brokers will come around to thinking that the Nifty or the Sensex will see 5 percent earnings growth in FY16 and, probably no more than 12-13 percent earnings growth in FY17 as well. That is respectable given the recent trajectory of earnings. 12 percent earnings growth will take the Sensex to about Rs 1,500 and the Nifty to Rs 475 and 12 percent is not insignificant in the current environment.
On that basis, even after the recent fall, the Sensex is trading at 16 times one year forward and the Nifty is trading at 15.5 times. That is not cheap given the earnings growth that we are seeing and given the global problems that we have. We need to cool down on valuations as well and I can easily see 10 percent slide in valuations from here unless our earnings pick up.
So, that risk remains for the market and that is the big headline risk that if the global volatility persists and foreign institutional investors (FIIs) continue to withdraw money, we could see valuations contracting by 10 percent more from here which would not take you even then to the worst valuations we have seen in bearish phases in the market, merely taking it down to about 14 times.