Speaking to CNBC-TV18 Gautam Chhaochharia, Head of India Research at UBS Securities, said that the longer India story remains intact. Demonetisation doesn’t impair the economic trajectory in the long term. He said he is estimating a 3-6 month disruption which may have been priced in by many stocks already.
It is difficult to assess the impact on GDP rate owing to cash ban. “It is difficult to take a linear view,” he said, adding that he believes the GDP for this fiscal year could be about 6 percent, but it will go up to 8 percent because of base effect.
Nifty earnings growth in FY17 will be 5 percent, and 14 percent for FY18, he said.
FIIs have been net sellers in the last two weeks on buzz that the US Fed will hike rates and make borrowings expensive. Till a week ago, markets were EM driven, he said, admitting that over the last week India has been underperforming a bit.
He is overweight on NBFCs. But the risk-reward skew is wider, he warned.
SBI and ICICI Bank remain top picks and should benefit from higher deposits and credit cycle, he said.Below is the verbatim transcript of Gautam Chhaochharia’s interview to Latha Venkatesh, Anuj Singhal & Sonia Shenoy.
Sonia: You do mention in your note that this is a good buying opportunity into names like Eicher Motors, Asian Paints, Maruti Suzuki, basically the consumption story. Do you think the worst of the demonetisation impact is in the price?
A: It depends on the timeframe. So, the longer term story still remains intact, it always is in India unless something really extreme happen. The demonetisation the way we are looking at it is it does not impair the economic trajectory from a longer term perspective. The short-term disruption, broader commentary from investors and looking at the market correction seems to be expectation of three-six months disruption at most which could possibly be priced in many stocks, not all stocks, I can't comment on individual stocks, but many stocks are possibly pricing that in. So, the risk reward will be stock specific but the broader market definitely seems to be much more balanced now than being attractive over last few months.
Latha: Generally what is the call? We have got some people taking away 0.5 percent, 1-2 percent from the gross domestic product (GDP), probably 5 percentage points from earnings. How are you approaching the second half earnings?
A: There are still many unknowns. The known part we all know that there will be short term disruption, formalisation of economy etc. What is still unknown is whether this disruption lasts beyond three-six months, the policy response of the government and Reserve Bank of India (RBI), if any, and also post demonetisation do we see goods and services tax (GST) implementation and other anti-graft measures because they will have their own impact on economic activity. So, right now it is difficult to take a linear view. So, we look at different scenario and get a sense. So in most scenarios we do see that FY17 GDP will come off. If we see three-six months of disruption then GDP for FY17 could be at 6 percent but it will go back up towards 8 percent next year largely also because of the base effect and normalisation.
Earnings, we have always been cautious on earnings throughout this year primarily because estimates were over optimistic to us. We take it down even further. So, now we are looking at about 5 percent Nifty earnings growth for 2017 and 14 percent for FY18. So, clearly earnings will be impacted. But the key is when and at what levels the market starts looking beyond the next three-six months of disruption.Anuj: From Foreign Institutional Investors (FII) point of view we have seen consistent selling. From October 15, there has been just two days of buying and otherwise huge selling. It is somewhere around Rs 25,000 crore. Do you think this is more of an emerging market (EM) problem which will settle down or it is India specific as well off late?
A: Till a week back I would say it was completely EM driven because India was not really underperforming but over the last week or so we have seen India underperforming a bit. So, since demonetisation for example India has underperformed by 3 percent the EM markets. So, some sense or some caution around this demonetisation impact is being possibly built but very marginal. So, in our framework when you look at different scenarios it is partially pricing in the three-six months disruption. It's nowhere near pricing in a more extreme or negative impact on economic activity beyond three-six months.
Latha: What kinds of downsides are possible for the market now and where would you seek shelter if that downside came?
A: We always look at different scenarios for getting a risk reward framework for the market and that framework now suggest a more evenly balanced cue for Nifty but it also suggests a very wide range of upside and downside which we haven't seen for a while which kind of reflects the uncertainty around the future outcomes based on policy response etc.
So, our downside scenario for Nifty is 6,600. That plays out if we see a prolonged impact of economic dislocation beyond three-six months and in the face of such dislocation even the policy stimulus or intervention by the government and RBI is minimal or is not very effective which is a downside scenario which is a low probability scenario, I won't say it is a very high probability scenario. A downside from the current levels or the near term for the next three months that could always happen one, because of what is happening globally and second because it is easier to say that we all know about near term disruption but when month after month if you start seeing weak numbers then it does test investors patience. So, the way we put investors is November-December weak numbers I don't think will matter much for market. January-February-March numbers being weak again it could test investors' patience.
Sonia: The other pocket which has made an attempt to recover is non-banking financial companies (NBFCs). Bharat Financial Inclusion told us this morning that the disbursements have picked up yet again between November 21st and 25th. Would you put any fresh money to work here?
A: The broader non-bank financials, we are overweight but we will be stock specific. The risk reward cue is even wider in that sector because the stocks have also corrected a lot but the earnings vulnerability in a more negative scenario is much higher for those stocks there. So, you have to be a bit careful and it depends on the risk appetite of the investor. So, I won't take individual names but we still remain overweight on NBFCs.
Anuj: The last two or three years in India has been all of individual stocks. It has been a bottom up stock pickers delight. Do you think we continue in that phase of market and all time highs for Nifty take a lot of time but a lot of wealth is created by individual stocks?
A: Completely. That remains a theme for India and still remains and even in our largecap mostly preferred portfolio and a sector positioning you will see many sectors having both most proffered and least proffered names. So, even in largecaps we see that divergence clearly playing out.
Latha: Give us some indication therefore where would you take these long-term bets. I don't know what your compliance rules are in terms of speaking about stocks but you all are pretty bullish on FY18 going by your - as you say the GDP going to 6, it is 8 next year, you have a very positive turnout after this catharsis of demonetisation and GST. So, where should the long term bets be?
A: Just to caution there the 8 percent number looks optically high on a very low base but even after 8 percent the FY18 GDP absolute number, the nominal rupee or dollar number will be lower than what our existing scenario was, so the absolute earnings per share (EPS) of the market will also be lower versus where it was.
However, having said that on the sector part we can talk about sector allocation. So, the change we have made now is moved consumer staples to overweight because to us what is becoming clearer is that this is a transfer of wealth from informal to formal in government and also possibly income generating capability in the future moves away from informal to formal and government in the form of higher taxes and higher market share which should bode well for the medium-term for the consumer staples and near term obviously it adds to some near defensiveness to your portfolio given the uncertainty around the markets.
Sonia: Any interest in the telecom space at all?
A: Telecom the investor interest has come down but we still remain overweight in the sector primarily on the thesis of both consolidation potential as well as the data boom. So, that thesis doesn't change.
Latha: I noticed from your strategy note that ICICI Bank and State Bank of India (SBI) remain top picks and should benefit from higher deposits and the credit cycle. Would you worry that immediately there could be some negatives because of asset quality in a sector which hither to we didn’t expect at all, micro, small and medium enterprises (MSMEs) and small and medium enterprises (SMEs) sector.
A: The near term disruption which is if the informal economy gets hurt for three to six months, there could be a negative surprise on the short-term. However, also remember that from any scenario you look at, the credit cycle should be supportive over the next couple of year period. So, apart from the non-performing loans (NPL) cycle bottoming out, we are also seeing the building blocks for the credit cycle bottoming out and possibly picking up over the next two years because of the liquidity which is coming through to the system.
We do like the broader banking sector so to say. However, I cannot comment on specific stocks but you have to remember that credit cycle supporting, non-performing loans (NPL) cycle bottoming out, they are far bigger drivers than the short-term disruption. Again when you talk about the informal economy being disrupted in the short-term, key is also as to how quickly they normalise. So, if you are assuming that the informal economy which was relying on cash as a business model gets permanently disrupted or they reorient their business model, so that is the key.
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