See pre-Budget rally; weak earnings a worry: Kotak's Bhatia

He says the government needs to do something quickly to stimulate growth as the capex cycle is still showing no signs of recovery.

Bhatia is hoping for a rebound in the automobile sector in the second half of this calendar.

In case, the recovery does not come through, auto stocks could correct 15-20 percent, he says.

If auto companies fare poorly, the pressure will spread to auto components firms as well, he says.

Below is the transcript of Sandeep Bhatia's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Do you think the first setback to the National Democratic Alliance (NDA) government, to Prime Minister Narendra Modi in the form of the Delhi exit polls will cast a deep gash, the markets have opened about a 3 quarters of a percent lower, 0.8 percent lower, is it just that, one day worry for the markets?A: The entire Delhi elections -- if we go by the exit polls, we have Aam Aadmi Party (AAP) forming a majority government, which is a welcome development I think again the electorate has voted in a majority government which is always a good thing. We have Bharatiya Janata Party (BJP) who was the largest party in the previous elections. Now a year later coming in a second maybe losing 4-5 seats from the last tally in the worse case situation and so in the whole broader scheme of things of India’s momentum growth story, remember there are 70 assembly segments in the Delhi elections that we are contesting, there are over 4,200 assembly segments all over India.So just to put this as perspective, it is 1.5 percent of the total assembly segments available for India and therefore it cannot be a big setback. Yes, it is great if we have BJP winning each election, election after election but we have seen that it is not possible. Even in Jammu and Kashmir, they had a fantastic show but they didn’t take the majority though they were aiming for the majority. Clearly, in Delhi it is a media saturated assembly election and therefore a good thing will be that we have a majority government, whoever forms the government that is. I don’t think it will derail the India story, given the numbers which I just explained, it is like 1.5 percent of the assembly segments of this country.So I genuinely don’t think that can derail or be a major setback for this market. If the market corrects, it is because of the fact that we have gone through our earnings season that our earnings season has not resulted in major earnings upgrade in fact the consensus is that the earnings will come through only at a later stage, which is why the markets may have correction and that is it.

Sonia: Do you think Arun Jaitley could perhaps rewrite or rethink the Budget speech because this time around the electorate has voted for things like secularism, subsidies, very different from what the electorate voted way back in May 2014, so do you expect these elections to have any bearing on the Budget speech, the political dynamics hence?A: If AAP wins, I would take this that the electorate has voted for a countable, clean, corruption free administration. I think this is the same kind of vote that the overall national mandate also delivered in addition to the fact that the nation had also delivered increasing performance. That was a national election, this is a state level election. Therefore the priorities of the electorate will change and if you look at the municipal election then the priorities will be even more narrow. So let us not read such an overarching message in one assembly election as it changes the electorate mood. There is no doubt that if there are national elections held even today, BJP will come with a majority. So that goes without saying. So I wouldn’t think that this is a major change in what the electorate is voting for, the electorate continues to vote for majority governments, governments which are more accountable, transparent and governments which will act and I don’t think that is something which even AAP can walk away from and in fact we all know that the pressure is on whoever comes into power to be more accountable and to deliver on its promises.

Latha: How would you expect the year to pan out? Are you even expecting a pre-Budget rally yet again, the Nifty making a dash beyond 9,000?A: There could be a pre-Budget rally, you could have lots of hopes building up, I will caution everybody and all media channels know this that Budget is just one day of the year, the economy operates all the 365 days of the year. Even on holidays, the economy is working, policy decisions can be made as part of the Budget and outside the Budget, we have seen that this government is able to think out of the box, we have seen a lot of momentum in various spheres in which the Central government operates, we have also seen ordinances in the economy side. We need to see if those ordinances become legislations eventually and that we have a stable policy regime, which is what this government has been saying time and again that we want to have a stable policy regime, which is clear, transparent so that decision-making and doing business in India becomes easier, which is what this government has to deliver in its Budget day and during the rest of the year.I think the real challenge will be for this market to go through this slack earnings period that we are going to witness over the next six months and then see whether the momentum in GDP which is what we require, the momentum in capital investments by corporates, the momentum in consumption by the households whether all that comes through or not. As we heard Uday Kotak in his inaugural speech, we have to take the right policy decisions and we don’t need to chase growth, we need to do the right thing and eventually growth will chase us. I don’t think that narrative needs to change in the Budget.

Sonia: I was going through your key speakers that are at your conference and apart from Uday Kotak, there is Deepak Parekh, RC Bhargava, Baba Kalyani, Adi Godrej. In your interactions with India Inc, what is the sense you are getting about the capex cycle, has there been any signs of a pick up there?A: This conference’s headline is ‘Millenium makers of India’ and we have some of the biggest business houses entrepreneurs coming through. We have over 550 clients from India and from abroad foreign institutional investors (FIIs) coming through, we have over 7,000 meetings. The entire who’s who of corporate India is attending, this is a monster of a conference with over 100 corporates coming through in the next three days.What I can say is that the capex cycle is still someway from seeing a revival. I think again the markets, the media and everyone thinks that whenever there is Reserve Bank of India (RBI) policy, if there is a rate cut then there would be immediate impact in terms of capital investment. If there is a Budget then there would be something which will stimulate the economy immediately. I think the corporate sector continues to have a lot of faith and clearly the decision-making on capex will happen when there is demand revival which is why Uday Kotak alluded to the fact that we have to see -- something which I have also mentioned in my previous interactions on this channel that we have to see whether the government can do something to stimulate demand and GDP growth and whether public spending can do that and that is something which needs to be seen and that is one thing which I will see in this Budget rather than any other major factor because clearly other than some small tax concessions maybe to individuals or some kind of simplification for corporates, no major tax incentives can be given. We just want to see India do the right things and benefits from the benign macroeconomic situation that we find ourselves in.Latha: I was reading your strategy report that came in early February and you are speaking about the gap between valuations and performance. Is there anything that you would shed at this point in time because valuations are too rich?A: There are two aspects of valuations, one is the cost of capital and the second part is earnings growth. On a very simplistic ways, I don’t want to go into the technicalities, a fall in cost of capital helps higher multiples rising and faster earnings growth helps P/E multiples. We have not seen higher earnings growth, we hope we will see higher earnings growth. What we have seen is falling cost of capital and we also hope that longer-term, the India’s cost of capital will be lower than what it has been given the macroeconomic situation that India finds itself in, which is the only reason why multiples can go up. If you look at that in the market then probably there are pockets of overvaluation, there would be some overvaluation, which we would see in consumer staples if multiples are going over 45-50 times then it becomes expensive or there would be some bits on the technology side where there have been earnings impact because of the cross currency movement, so there are bits of overvaluation in the market, the overall market is still not way too expensive to have a big selloff.

Sonia: You have a lot of auto and auto ancillary companies that are attending your conference and you have spoken about this sector in the past as well but how do you approach some of these ancillary makers like Apollo Tyres that have run up far ahead of their earnings performance?A: I would think that if we don’t see a big auto rebound, we are hoping for that to come through by second half of this year so from October-December onwards if we don’t see that, most of these valuations and earnings will start correcting and it is clearly something which we don’t build in, we do expect that interest rates will be lower, we do expect that the consumption cycle will be stronger six months down the road. Right now, I am not saying that sell out but yes if these risks as you mentioned do come through then some of these tyre companies or even some of the ancillary companies would see major cuts of maybe 15-20 percent in the prices.Latha: How are you looking at the year ahead? The overall impression is that dips would be bought, what kind of gains can you look ahead to in the next 12 months?A: The next 12 months will be in two parts. Logically, we will be reacting to earnings in the first half from April to September, we will be reacting to earnings and markets should be rangebound then the second part will be the crucial part here and here it is either delivery of earnings expectations or a disappointment of earnings expectations that we will witness in Q4 of the calendar year. So October to December will be a crucial period.Also remember there would be just one more state elections, which is in the state of Bihar, somewhere in the end of October if the schedules of elections are held on time, probably that elections will go BJP’s way and we will see what happens in the run up to that election, the politics will also be interesting to watch.I think that this market will have muted returns in the foreseeable next six months not more than 10-12 percent, this has become a typical India market where India is basically a stock picker’s delight, a challenge to a broader index heavy investor, so if you are looking at just index gains, these maybe difficult to come by, India is in a situation and India benefits the most when the rest of the world looks okay but not great and India looks better, which is the situation we have found ourselves for the last one-year or so that the world looks okay to slightly weak while India looks better.If the world takes a big hit during this year then we will also come off with it but the good thing will be that we will probably come off much lower than rest of the world and commodity prices will continue to remain weak and if commodity cycle changes and it goes to a more elevated levels than we are at, maybe it won’t go back to the highs, which we saw a year and two years ago but from hereon slightly more, I think it is a better situation for India to be in, India can take some slightly higher commodity prices, but the broader world macro economy should hold up and that would be a better situation to be in. If that happens then India would probably see double digit returns coming through of 18-20 percent by the end of this year. So I think the global macro and India’s own growth revival path will converge probably in the second half around September-October.