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Last Updated : Jan 26, 2016 12:31 PM IST | Source: CNBC-TV18

See more downgrades in banking; go for bottom-up approach: Ambit

Pramod Gubbi of Ambit says the market is relatively more attractive now. He advises investors to have a bottom up approach.


Given the current market scenario, a bottom is definitely difficult to assess, is the word coming in from Pramod Gubbi of Ambit. He, however, says the market is relatively more attractive now. He advises investors to have a bottom up approach.


He is positive on Indian equities from a long-term perspective — 2-3 years time horizon.


On the ongoing earnings season, he says it is as per expectation. He had expected earnings downgrades and sees a few more of them in the banking sector. He feels the banking sector is likely to remain weak for a while.

Below is the verbatim transcript of Pramod Gubbi's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: From your perch what is the sense looking like that 2016's bottom is in place and maybe for the next couple of months with all the central bankers in a mood to print more money, we could see more upsides?

A: It is extremely difficult to assess the bottom here given the number of moving parts and the number of factors that could change literally minute-by-minute. So to that extent, I won't second-guess where the market is going. What could be a useful assessment is how have prices behaved, how have valuations behaved given the changes in earnings estimates that you have to make to that extent, yes, the market is relatively more attractive than it was a couple of months ago. But I won't hazard a guess whether we are close to the bottom or not.

Sonia: What have you made of the earnings season so far?

A: The earnings season is pretty much in line with what we were expecting. We have been highlighting consistent and sustain downgrades to consensus estimates for the Indian market and that is playing out in that direction.

What we are worried is we are not seeing any sort of bottoming out in that downgrade cycle. We are likely to see a few more particularly given what is happening in the banking sector where there seems to be some sort of urgency to clean up the balance sheets. Now that is likely going to have an impact on banking earnings but it is also going to have a rub-off effect on the rest of the market particularly rate sensitive, capex incentive sectors. So yes, it is weak as expected, likely to remain weak going forward as well.

Latha: What would you latch on to? You said that the only thing positive about the fall is that valuations are attractive. Where would you place your bets?

A: It is better to work with bottom-up approach in these times because we have highlighted India itself -- how much this global turmoil -- India itself is going through some readjustment in terms of the drivers of the economy. To that extent, it is very difficult to play it top-down.

Consumption is affected given the reduction in subsidies, given the reduction in government spend sort of fiscal consolidation that we have seen in the banking systems situation also meant that capex in investment demand is affected. So they are not any sort of secular or clear-cut top-down stories that you can play.

What we are pointing investors to is if you always like certain bottom-up stocks, with good quality managements, in areas which are by and large immune to the macro, they have their own drivers of earnings going forward, the only thing holding back was the expensive valuations. That is less of a worry. So those are the sort of stuff that you liked by post the events of this month.

Sonia: I understand that it is hard to call bottom in this market but do you think that the bull market in India is still intact?

A: It is tough to define where you started for the bull market but given what we have been saying over the past 18 months or so, there has been a massive readjustment of the economy from a subsidy driven consumer spending to a much more sustainable base that is getting formed.

Having said that, the short-term effects such a restructuring of the economy is likely to be negative the way we have seen impact on corporate earnings. Like I said earlier as well, it might liger on for a bit but what it does lead foundations of more sustainable growth, less inflationary growth going forward. However, of course we also have to expect certain benign environment in terms of global factors to support that as well.

So I would be interested in Indian equities for the longer-term given sort of these changes but now whether that classifies as being hopeful in the bull market will sustain or not, I am not sure.

Latha: How long is the long-term?

A: I think anything over two-three years timeframe is definitely looking positive. It all depends on how the global factors are also aligned to support this sort of a positive trend for India.

Latha: Can you size up the gyrations in the global market? At the end of this rather torturous three weeks of January, where are fund flows headed, will they look in India's direction, will they even look in EM direction?

A: EM certainly not, India possibly so. However, to the extent that we have seen the sort of decoupling between India and perhaps a couple of other markets with the general emerging market asset class over the last 18 months.

If you remember, emerging market as an asset class have seen outflows for more than 2.5-3 years now whereas India has only begun to see that effect only over the last 8-9 months. That means that for a good period, between early 2014 and mid-2015, we went against the direction of those flows, which also meant that our weight within the emerging market holdings of EM investors went up consistently.

To the extent that, I don’t think EM investors could justify increasing that weight anymore and hence as a result any further outflows in that asset class would mean that India also have to participate in those outflows. That is exactly what we have seen over the last 8-9 months, nothing has changed in that dynamic. So if the asset class as a whole continues to see outflows, we are likely to be seen part of that selling as well.

One positive thing could be if global investors sort of discern India as a relatively more attractive market, maybe there could be more positive inflows to country specific products or India specific funds but that as we know still remains a smaller portion of the larger pie. So overall flows wise, I think we still remain negative.

Latha: We just saw the Axis numbers. What would be your take on banks -- private banks in particular but all banks?

A: We are seeing some sort of action from the Reserve Bank of India (RBI) in terms of sense of urgency to clean up the balance sheets and rightly so. So that we are in a position to kick-start the investment cycle without banks participating in credit growth. That is unlikely to be the case and hence as a result this clean up perhaps mandated.

Given that I think there is another three-four quarters of impact in terms of credit cost for the banks on earnings. So to that extent, it would be better to stay away but there are few who are exceptions where we think that the market action or the price action has been a bit overdone and valuations give you that sort of margin of safety to live through this 3-4 quarters of higher provisioning that is expected.

You mentioned Axis, it is perhaps one of them where we think that the risk reward is favourable for the investor.

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First Published on Jan 25, 2016 10:07 am
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