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Last Updated : May 02, 2016 08:01 PM IST | Source: CNBC-TV18

Take mkt's exit opportunity with both hands: Ambit's Mukherjea

On back of weak domestic and global cues, Sensex is likely to touch 22,000 mark by the end of this year, says Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital.


Weak global and domestic cues could push the Sensex back to its 22,000 mark by FY17-end, says Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital.

“India is not an easy market to invest in,” he says. Widening stress in the banking sector, sluggish economic indicators as well as central banks commentary is indicating a difficult time ahead.

Mukherjea advises investors to remain cautious and use decent earnings to book profits as and when possible, especially in cyclical names.

Speaking on sectors, he says that one must look at sectors with ‘bedrock strong franchise’ like autos, IT and cement. Competitive edge in IT makes the sector attractive.

Cement sector, which has been reaping benefits of 21-22 percent government capex growth in FY16, is likely to see reduction in investments by mid-2017, Mukherjea says.

Even in FMCG, he advises booking profits whenever possible. Rural stories will be difficult under the current government, he says adding that once monsoon comes, temptation to stay in the sector will increase.

Mukerjea is bullish on export-oriented stocks, IT, auto and chemical sector.

Below is the verbatim transcript of Saurabh Mukherjea’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: The market has been a bit downbeat post the volatile global cues, would that deter you or do you think that is just a buying opportunity?

A: It was exactly a year ago when the Sensex was roughly around 30,000 when we started becoming bearish on India. Around August-September, we sort of ramped the volume of our bearishness and our 22,000 Sensex target came out. We remain of the view that this is not an easy market in India to invest and we remain of the view of that this is not really a bull market.

It is a combination of global cues; as you referred to the Bank Japan (BoJ) announcement last week was nothing short of astonishing given the weakness in the Japanese economy, their reluctance to ease or go further towards negative interest rates, I think is a telling sign that in June when the European Central Bank (ECB) and Fed make their moves will have further negativity in global cues.

Secondly, on the domestic front, the banking system continues to lurch from one bad quarter to another. Now, my reckoning is the weakness in the asset quality front is now spilling over into challenges in the liability franchises of the banks, so, fairly difficult situations.

I am not one of those who reads the papers and sort of gets taken away by these green shoots. I don’t think there is that much by way of a recovery happening and my reckoning is we are still heading towards a Sensex 22,000 in this fiscal.

Latha: Which means revisit of Nifty 6,800 and lower is not ruled out?

A: I would think so. When the market hit 22,900, there was sort of a point of view that all hell will be break loose in India; I am not of that point of view that there is some need to panic here. Our view was 22,000 even when the market had fallen below 23,000 and that still remains the view.

I think there is a sluggish economy, there isn't that much by way of recovery, the banking system woes are serious and the global situation I think is very difficult.

I think the end of quantitative easing (QE), the limits of QE are now increasingly been discovered by the global central banks and with the banking system in the west and in Japan crunching under negative interest rates, I think it is a matter of time before central bankers throw their hands up and say that we really can’t deliver anything else through monetary policy easing. So, difficult situation I would say and circumspection, caution should still be the order of the day.

Latha: Therefore a tactical up move can happen for a longish bit like we saw the run from 22,900 all the way to 27,000. You don’t play that at all?

A: If one is an astute trader which I am not, if one is astute trader and you can time your entry and exit into markets then obviously both tactical up moves and down moves can be played but I don’t profess to have any great expertise in timing the market or in trading.

My focus has been on fundamentals and as I said whether I look at the global situation, the BoJ announcement is telling we will get some similar sounding announcements from other central banks.

However, back home in India, if I look at the banking system results, if I look at the forward guidance from the banks, I think we are in a pretty difficult position and my training tells me that if underlying fundamentals are weak then one needs to take profits when everybody else is optimistic. There is no point waiting for the market to become bearish and for numbers to crumble.

It has been a reasonably decent result season so far, so, use that basis of a decent result season and take profits where you can especially in cyclical sectors because I don’t think you will get these sorts of windows again and again. The market is being kind, it is giving you an exit window, take it with both hands.

Sonia: We are showing some of your 10 baggers that you have had in your portfolio and two of them are HCL technologies and Tata Consultancy Services (TCS). Were you disappointed with the very slow pace of growth this quarter and would you advice taking profits here?

A: I can’t talk about stocks specifics. I don’t have compliance permission to discuss stock specifics. However, in the IT sector, what we have seen over the last three-four years is, at any given point in time, couple of the IT stocks seems to do well. They post three-five quarters of strong numbers whilst a couple of others suffer.

I think that pattern is continuing, the leadership seems to change, we had a good spell of HCL Technologies for a good two-three years and Infosys was under the hammer then. The roles have somewhat reversed.

I think in that sector, the only logical way to invest is buy two high quality IT companies where you think the franchises are credible, the management teams are doing a good job of generating not just topline growth but also operating margin improvements and sit on them for a few years.

IT as a sector, India remains one of the countries where there is a competitive advantage, IT is one of the sectors in which we have a competitive advantage as a country and when the alarmist voices get too strong in IT as was the case I think four-five months back, we turn around to our clients and say that this is a sector you should buy.

So, alongside a high quality consumer names, alongside good quality auto names, cement names, IT is one of the sectors where you actually have bedrock of a strong franchise into which you can do multi-year investments.

You can’t say the same about too many other sectors in India especially in cyclicals there aren’t too many franchises out there where I can see bedrock of a strong franchise and hence the concern about the market as a whole. We are market dominated by cyclicals, 60-70 percent of our stock market is cyclical and that is where the core of the problem at the moment lies.

Latha: You referred all those sectors, the staples, some of them have shown decent volume growth even in the face of competition from the likes of Patanjali and rural distress. Likewise cement, you referred to that, don’t these look like green shoots to you?

A: I think in cement, it is reasonably clear that the 21-22 percent government capex growth in FY16 is bearing fruit i.e. road construction quite visibly when you travel around the country, there is large scale road construction taking place. Now we are also moving to irrigation canal construction and that has obviously given a fillip to the cement demand.

The reason I am apprehensive about the sustenance of this is in the recent Budget, government capex was cut to 4 percent from 21 percent. If you look at the last seven-eight larger state’s Budget, a very similar pattern has followed where capex has been cut back quiet sharply in the current fiscal. My reckoning is, by the middle of the year the government capex boom will dissipate and will then be looking at a difficult position on cement demand.

So, cement demand stocks had a tremendous rally on EV per tonne and EV/EBITDA, they are trading at all time highs and again even there I would suggest taking profits although I can see this one sector where we did turn bias three months ago because we could see the demand up tick is going to be quite sharp both in the quarter ending March and in the quarter ending June. However, the market is now baked in the demand up tick and it makes sense to take profit even in cement.

Sonia: What is that one internal that will make you change your bearish view on the index and perhaps rework your Sensex target higher?

A: The area where we have been consistently concerned for two years is banks. It is a problem which has got wider and wider and now with credit growth at 10-11 percent for a good two years running you can see that is now spilling over into the smaller SME segment of the economy. Working capital has become very challenging to get for small businesses. Until the finance ministry comes up with a credible plan to recapitalise and resurrect the banking sector, it is very difficult to turn positive on India.

I have never seen a country - I have been in the market for 12 years in different parts of the world. I have never seen a country that stage an economic recovery with the fundamentally ailing banking system. It doesn't happen, it doesn't work.

Hence, until I see a credible plan to recap the banking system I will stay circumspect on India. If global cues turn positive, for example the Fed says that look American economy isn't going anywhere and we are becoming decidedly more loose with monetary policy that will obviously give the Indian market a fillip.

It will allow us to run up perhaps to 30,000 but the underlying fundamental weakness is not going to go away just because of the Fed or the European Central Bank (ECB),we have to fix our own problems by ourselves.

_PAGEBREAK_

Latha: So, in the meanwhile what would be the sectors, would you still say there is space to buy the consumer staples. You said cement is valued, is there any buy opportunity in the others?

A: What is very interesting over the last three months is our good and clean portfolios started doing very well again. So, what I found interesting was that the last year although the market wasn't going anywhere even fundamentally oriented investing was struggling but in this recent 10-11 percent up move in the market our high quality focussed investment style has done well.

So, sectors I would particularly closely look at in auto there are multiple buys out there. Again for compliance reasons I can't talk about buys. But both in passenger vehicles and in commercial vehicles there are clearly well run companies who are posting good numbers have been doing so for a while. There is sustenance in that story.

Similarly even in the banking sector in the small cap banks regionally centric banks, regionally centric Non-Banking Financial Company (NBFC) there are stories worth investing in. What is happening is very interesting.

As the public sector undertaking (PSU) banks almost pull back from commercial lending altogether. And especially small business working capital finance is creating opportunities for smaller lenders, whether they will be NBFCs or the smaller banks and that is worth latching into by investing in small banks with good asset quality, sensible valuations and ditto with NBFCs.

The final area I would look at is exporters. My reckoning is the rupee has done very well to be at Rs 66/USD it is quite astonishing the strength of the rupee I would say. My reckoning is the rupee will come under pressure in the next 12 months and in that context exporters both in the IT context but also in sectors such as chemicals will have a decent run.

Auto again benefits from a weak rupee because the export franchises of auto companies have become quite large. So, auto, smaller financial and export centric story both in IT and in chemicals and auto are worth looking at.

Sonia: I thought you would also mention the domestic consumption space because you have a lot of exposure there whether it is in Marico, Britannia, Berger Paints and some of them like Marico have reported good numbers this quarter?

A: True, we do have exposure to that and it is also reasonably clear when India is in reasonable shape. My concern over India - I am not banging the table on India piece is it would appear basis data flows and numbers that the dotcom investing boom is dissipating and already we are seeing office space demand fall in some of the bigger cities.

If this trend continues of dotcom flows from the west to India dissipating it will have some bearing on job creation and salary hikes as the year goes by. So, whilst the governments pay commission numbers click through as we get into the year and the pay commission should give urban consumption a bit of fillip.

My fear is that if the dotcom monies pullout and my reckoning is there could be a pretty sharper lot of dotcom funding, we will very quickly see the end of discounting and a challenge in urban consumption.

So, that is why we will little circumspect on the urban consumption space as we try to figure out how the dust is settling on the dotcom unwind.

Latha: But wont the rains make a difference?

A: Yes, so, it is obviously the big unknown for all of us. We are all hoping that this intense heat across the country translates into a better monsoon. We have all become experts on what drives monsoon. The point I would think is I would still focus on is if you look at government transfers to rural India under the NDA that is almost like a regime shift from the UPA.

So, even in this Budget the Minster of Rural Development (MORD) transfers to rural India this year will be something like 0.6-0.7 percent of GDP. Just to put it in perspective in FY09 the MORD spends was something like 1.2 percent of GDP. So, the drop in the rural spend under the NDA has been so sharp that whilst the monsoon can give you temporary relief in terms of the rural spends it will be temporary.

So, from a structural perspective of rural stories whether they be auto-centric stories or NBFC-centric stories rural stories will find the going much harder under the NDA which simply doesn't have as much of a focus on fiscal transfers from taxpayers to rural India as the previous dispensation date. I am not making a comment on the wisdom of those transfers or lack thereof. I am simply saying as a matter of fact the data is on the table.

Rural transfers have abated substantially and hence the monsoon will be a temporary relief and if the current trend of rally in the rural focussed stocks continues it will be a great time to take profits once the rains comes because once the rains come we will all sort of know that the upside is factored in but there will be a challenge for rural stocks in the structural basis in the life of this government.

Latha: No points for the fact that this money maybe going to the intended beneficiary now?

A: So, the intended beneficiary in the current fiscal is the civil servant.

Latha: Things like DBT and all, after all even the amount of funds that went to the rural areas under the NREGS after the first two years probably everybody knew how to game the system. So, I am asking you the fact that things could be better targeted now because of Aadhaar and DBT won't make a difference?

A: That is a hope that we have and we have written quite extensively about it. If the better targeting materialises and we are hopeful that it will FMCG is a sector that benefits. So, in the old construct where the target was less than perfect it is reasonably clear that the rural transfers went to the rural elites and they bought their motorcycles, tractors and they built their houses and so on. So, that story will gradually unwind.

The 300 million poorest people in our country who deserve the money, will get the money and the most likely way they will spend the money is by buying small ticket consumables which is where the FMCGs, the Maricos, the HULs come into the picture. But again it is a big shift and our point of Prime Minister Modi's reset remains very valid.

The way the country is being run is changing and that is creating lots of dislocations both in the banking system and in the rural economy and all of us in the market are trying to grapple with those which is making our jobs that much more interesting.

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First Published on May 2, 2016 09:56 am
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