Sensex 22,000 risk stays; keep away from capex plays: Ambit

Noted analyst Saurabh Mukerjea of Ambit Capital made a dramatic call two weeks back, when he said that even as the Sensex's FY16 fair value was around 28,000, risks existed that could take it all the way down to 22,000.Mukherjea is continuing to remain circumspect, saying contrary to consensus opinion, economic sentiment may be getting worse, which could take the market to 22,000."I have been doing a fair bit of travelling lately. My view remains that we are in a difficult economic situation where liquidity is drying up at different levels of economy. Cash flow is getting very tight for small business and there could be issues in the money market," he told CNBC-TV18's Latha Venkatesh and Sonia Shenoy in an interview. "Overall business environment is deteriorating. It's a matter of time before that feeds in into corporate results and GDP growth."Mukherjea, CEO - Institutional Equities at Ambit, said investors should stay away from the default economic recovery plays -- stocks such as L&T, UltraTech Cement or ICICI Bank. He also said Ambit had revised down its earlier positive stance on the home improvement plays as it now expects the weakness in the real estate sector to further worsen."We are positive on companies that are either exposed to Indian exports or have a manufacturing story with not much exposure to core capex cycle," he said. "Our favourite picks are stocks such as HCL Tech, PI Industries, Torrent Pharma etc."Below is the transcript of the interview on CNBC-TV18.Latha: What do the market themselves look like? Do you think we should be using these dips to buy or are you getting a sense that we are going to get more attractive levels so sit on cash don’t put in all your money?A: We last spoke it was too weeks ago; the first one day in September was when we last spoke and I think the point I had made to your viewers then was whilst fair value for the Sensex FY16. Fair value for the Sensex is somewhere around 28,000 is a host of factors swirling around India at the moment. Macro economic factors, political factors which create a real risk that the market will go, the Sensex will go all the way down to 22,000. I am sticking to that view. Again, I have been doing fair bit of travelling over the last couple of weeks to Delhi, to some of the state capitals and my view remains that we are in a fairly difficult economic situation where liquidity is drying up at different levels of the economy. So, bank credit growth is obviously weak but even the small and medium-sized enterprises (SME) sector both in the formal economy and the formal SME sector cash flow is getting very tight for small businesses. In the money markets we have seen what happened around that whole Amtek Auto episode. My reckoning is that we are likely to have more liquidity related issues in the money market as well. So, the overall business environment is actually deteriorating by the passing quarter. Hence my view remains that from a fundamental stand point whilst 28,000 is a fair value the reasonable place for the Sensex to be at the year end there is reasonably good reason to be believe that we could go as far down to 22,000 on the Sensex. So remain circumspect just like we have been since February-March of this year.Latha: You are not holding out any hope by the fact that the inflation number that will come today will be 3.4 percent or definitely less than 3.50. The Index of Industrial Production (IIP) numbers were better than most analyst expectations. The current account deficit for the first time I can remember the entire deficit is getting bridged by foreign direct investment (FDI). FDI was a fairly stunning 10.2 billion for one quarter. You had that massive rate cut coming from HDFC Bank as well so a further push from the Reserve Bank of India (RBI)? Won’t money get a little loser? Are things on the mend? Are we in the darkest hour before dawn? A: At any point in time there is a bunch of high frequency data indicators; there is a bunch of macro developments which are reasonably positive. There is another set which is reasonably negative and it is always a tussle between the bulls and the bears. However, I look at the overall evolution of the data over the last six months. Our strong belief is the evolution of the data of the last six months has actually got progressively worst. Especially on corporate indicators leaving aside elements like government spends which has been broadly been to plan. The government has announced a two percent growth on the overall spending in the February 29th Budget and they have been sticking to their plan.The government’s means are fairly modest and to be fair to the government they are sticking within their modest fiscal means. Overall if I look at the corporate mood music not just the larger corporate, mid corporate, smaller corporate, dealers and distributors and a whole host of sectors and we do a lot of work of this sort on the ground level. It is unquestionably some of the hardest times I have seen for Corporate India in the last 5-7 years. I can’t remember too many junctures in the last 5-6-7 years well at the ground level of the economy the dealer distributor feedback the small business man’s feedback has been quite so grim. My reckoning is it is just a matter of time before that feeds in to even weaker corporate results and even weaker GDP numbers. I know the consensus view is that growth will be higher this year than it was last year but for the last six months I have been emphatic and saying that looks highly unlikely. It looks highly unlikely that economic growth in the current fiscal will be higher than last year. Our view is we will get 6.8 percent economic growth in the current fiscal as opposed to the 7.3 seen last year. There is nothing that I am seeing at the grass roots levels of the economy which is suggesting to me the otherwise.Sonia: I must tell you that this report with the 22,000 Sensex target created quite a stir on our moneycontrol page. There was a heated debate on this particular target but be that as it may since we spoke last some amount of dust has settled globally. At least the incremental bad news has stopped from China. Do you get a sense that if the Fed goes ahead with a lift off this time around there could be a major downside for emerging markets or has a lot of that already been factored in? A: The Fed signaled so long ago that it was going to hike at some stage. The Reserve Bank of India (RBI) has prepared pretty well for the specifics of the lift off. Again, I remember several times on your program I have mentioned the fact that the hike in itself is unlikely to cause major challenges for India. The problem is the second round affects that and the most logical second round affect one needs to worry about is if the dollar strengthens on the back of the Fed hiking and giving more bullish indications of further hikes to come.If the dollar strengthens, renminbi (RMB) naturally will get dragged up with it. Will the Chinese yen devalue by another 5 percent perhaps 10 percent? If that happens that is where the second round of impacts is where we need to worry. The specific of the fed itself hiking I don’t think is the event that will spook Indian markets or indeed cause FII outflows of the country. The concern is the second round of impact. Already I have heard from several Indian listed manufacturers that their Chinese suppliers are offering them 5 percent discounts already and promising to pass on yuan devaluation one for one.If you are an Indian promoter will you invest in your own country when you got the potential for much cheaper supplies from China and that is where I think on an incremental basis the capital expenditure (capex) recovery is getting even more postponed in our country with obvious downside impacts on gross domestic products (GDP) growth.Sonia: How do you position your portfolio then? Which are the companies that would get impacted by this and you should stay away from and on the fillip side you have been consistently saying that one should move to quality but then there is also the valuation argument. So, how do you position your portfolio at this juncture?A: Where I think the greatest downside risk is, is in the most popular cyclical plays. The sort of the stocks which by default come become the de facto economic recovery plays and I think three come to mind reasonably quickly Larsen & Toubro (L&T) as the largest construction and engineering company in the country is obviously a default recovery play. I think there is considerable downside. There remains considerable downside in L&T. UltraTech Cement as a largest cement company; similarly story it is almost seen as a default recovery play. Similar reasons to L&T, I think there is reasonable downside. Amongst the larger banks we continue to believe that the compositions of ICICI’s portfolio is the one which gives us greatest concern among the largest private sector banks. That is the default cyclical recovery plays is where our levels of concern are greatest. By dint of that logic where we have much greater confidence is in companies which have less exposure to the Indian cyclical story, more exposure to either an export centric story or a manufacturing story which has very little to do with the core economy. HCL Tech remains our favourite pick in the IT sector. PI Industries is a midcap chemical exporter that we have been highlighting for good couple of years. Our view is that both of these companies remain worth looking at.In pharmaceuticals for a longtime we have been looking at Torrent Pharmaceuticals as a midcap pharma company of considerable promise which has delivered quite steadily over the last two to three years. So, very much focusing on export centric plays or domestic manufacturing companies which are not linked to the core economic cycle not linked to the capex cycle. Hence veering away from a L&T, veering away from an ICICI Bank and an UltraTech towards the names such as HCL Tech, Torrent Pharmaceuticals and PI Industries.Latha: In your older theme the home improvement theme you don’t think there is anything that is still standing up against the tide, yes they have not got too much help from the economy in terms of more houses being built or perhaps economic development itself coming as expected but none of those themes -- Century Plyboards or Cera Sanitaryware or any of those home improvement themes?A: Home improvement theme I think that till 7-8 months we were reasonably bullish on them and then in our previous Good and Clean Portfolio, the Good and Clean that was published in May we took out all the home improvement plays out of that. Anything which is linked to the real estate cycle we took it out of the Good and Clean Portfolio that was published on May 12th. The reason for that was linked to our concern about the real estate cycle. We believe, and have quite strong grounds to believe, there is a broad based real estate correction taking place across the top 10 cities in our country. Prices are down anywhere between 5 percent in the fortunate areas and 25 percent in the less fortunate areas. More importantly transaction volumes appear to down a good 30-40 percent year-on-year and new launches in real estate are down anywhere between 40 to 80 percent year-on-year. Obviously, if new launches in real estate are down that entire eco-system around paint around cement around home building materials will face the challenge. And that is what we are seeing panning out over the last couple of quarters. I fear there is more pain there left in that story.