Year-end Sensex target 30100; earnings critical: HSBC India

Sector-wise, he is underweight on IT and pharma, but likes Infosys and Sun Pharma. He is also overweight on private sector banks.  

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

Latha: Is the downward correction over? We saw a fairly rapid decline from 8800 to 8300, almost non-stop and then that smart reversal. Do you think we have a little more to shake off as we get into the earnings season?

A: I would say that the correction was something more India specific. During that phase, if I look at other indices either in the region or in the western world, they were quite resilient. So, my gut feel is that it probably had to do with the largest block trade in Sun Pharma that we had seen; that almost about Rs 20,000 crore. So, people were probably creating room for it and various other things. So, I guess part of it was led by that and then once that overhang was behind us, I guess the markets showed some up tick.

However, having said that I would say there are two things that are going to be quite critical now. One is this earnings season and up till now it has been reasonable barring some hiccups on the IT side where we have had a little bit of stumble. However, I would say that the Indian Metrological Department (IMD) forecast yesterday is going to be also equally critical because one bad monsoon probably we can handle but also do be aware that IMD has spoken of a one third probability of it being a deficient year this time around. So, your updates start coming though maybe month or month and a half down the line, if there is too back-to-back poor monsoons then it could be a little tough in terms of rural off take and even in terms of the government responses.

Sonia: Generally the first observation that comes in from the Met is not the most accurate one, we get more accurate observations in June and July so should one be concerned about the monsoon forecast at this early stage?

A: Maybe not, I take your point completely that the accuracy of the forecast improves as we get along. However, I would say that is something one has to keep at the back of their mind, in a sense, it is a red flag. It is not that the IMD is solo in highlighting this. The Aussie Met office, the US Met office all have highlighted that there are situations which are probably indicating repeat of an El Nino kind of a phenomena in the weather situation. So, I would say it is something that one needs to be aware of.

Latha: We saw the tech results a little under the weather but since then some of these stocks have fallen. What is your view of the sector in general and your favourite picks there?

A: Overall on the defensive spectrum I must confess that we are not as enthused mainly because the stock performance that these sectors have shown. Last year after the initial euphoria post electoral verdict and so on, we have actually seen that the defensive spectrum of the market which includes healthcare and IT do exceedingly well. Part of it is also got to be the tailwind from the currency strength that the US dollar saw.

I must add here that HSBC has globally quite a counter consensus view that we believe that with the first quarter of this financial year that is June quarter, we believe that the dollar strength will come to a close. So, we do expect the euro dollar to start rebounding from here which makes us a little bit more cautious on those.

In fact from a strategy perspective on India, we are underweight tech and pharmaceuticals at this point of time though we do have individual stocks which we think there is some juice to extract. For example in IT we are still quite constructive about Infosys whereas in the pharmaceutical sector we still like names like Sun Pharma given that there is some juice to be extracted out of the Ranbaxy merger.

Sonia: I was going through your preferred stock list and over there you have NTPC which is in your Asia Super 10 and Gem Super 15 portfolio stock. Just tell us about what the trigger over there could be and in general the government has done quite a bit for the power sector in the last two or three months what are your key takeaways of how much it could improve the situation so far?

A: NTPC is something that we are seeing the triggers fall in place from multiple directions on an return on equity (RoE) expansion hereon. So, the first part has to do with the fact that they issued these bonus debentures to alter their capital structure to make it more productive in terms of shareholder return on equity. So that is an exercise that got done by March end.

Secondly, we are seeing some amount of under construction projects move into operational stage which should be a natural fillip for RoE as they become income earning rather than being dud assets on the balance sheet.

The third thing would be that in terms of their renewable foray where they are talking of putting up a lot of solar stations and other installations, we believe that could be the other added trigger because the leverage rates allowed there are better than what is allowed on thermal plants in terms of the RoE profile.

So, putting all of this together we believe that this story is definitely capable of delivering a 200-250 basis point improvement in RoE over the next two to three years which makes us quite constructive. The valuations are not very rich given the market move of almost about 40-45 percent last year. The stock has been a relative laggard which makes us quite positive on the name.

Latha: Among the financials your preferred stock is only HDFC Bank. You aren’t impressed by the Yes Bank numbers; you don’t think ICICI Bank has fallen enough, none of the other private guys?

A: Private bank as an overall sector we are overweight. I must add that in our top picks apart from HDFC Bank we also have IDFC which is transforming itself into a bank sometime by October. So, that is another name that we do like. Even on other names that you mentioned Yes Bank, etc we are overweight on these names.

In terms of our preferred picks it is obviously the ones where we see risk adjusted returns being the maximum. I would say that on the private banks as a whole universe there is going to be a little bit of a headwind near-term which is going to be that the deadline from Reserve Bank of India (RBI) in terms of restructuring of assets and etc lapses by March. As a result you might see an up tick in restructuring costs for a lot of these banks coming through into the earnings.

So, I would be a little selective on that segment at this point because there will be a lot of people who have grown quite aggressively in the recent past who could have some uptick in terms of restructured losses.

Sonia: Another one of your preferred stocks is Maruti Suzuki and that one comes out with its numbers on Monday and there is expectation that it will be a stable quarter. However, the only concern is that the entire sector has not seen too much of a revival on ground in terms of sales, etc. Would that not concern you or do you think the fact that Maruti has been out performing sector is reason enough to continue buying that stock?

A: The two more stronger things which are kicking in is that cost of ownership is clearly going down for consumers because of the weaker fuel prices in relative terms plus the fact that at least from April onwards the banks have started the policy transmission on the RBI dual rate cuts that were announced. So, to that extent, the cost of ownership even in terms of the EMIs, etc start drifting down. So, both of these things from an urban demand is definitely positive.

Rural has been okay so far. Obviously there is a risk that I cannot deny which is the monsoon successive potential failure prospect. However, I would say at least two of the engines seem to be firing which is the urban demand and the second is there has been slow up tick even in terms of the export output. So, these two things are doing okay for it.

Latha: Speaking of Maruti one is reminded of the way the auto ancillary companies have performed. We have seen minor trimming in Bharat Forge and the likes of Motherson Sumi. In your midcaps list I saw only Titan, isn’t the auto ancillary a great place to be in? Any preferred picks there?

A: We do come out with our midcap picks and we do have some names like Voltas, United Phosphorus and all there. So, there are certain names that we do like. Hathway was another name that we liked. However, coming to your specific question on auto ancillary space, I would say that, there are two parts here.

One is that would they be the best in class? Probably people who are more locally exposed given the commercial vehicle (CV) cycle recovery and who are benefiting from it will do better. We recently some data come out from the US trucking industry which shows some weakness. There was also this issue off late about the euro weakness which was impacting some of the European translation related gains coming through for companies. So, people who have substation exports could see some headwinds in the near-term on the results as such.

Sonia: For the next three to six months apart from earnings that we discussed where there is no guarantee when the recovery could come through what could be the next most important positive trigger that the market should look forward to?

A: I would say that in the first half of the parliamentary session itself we have had at least half dozen bills getting passed. We are tending to get too much swayed by one bill which has attained a lot of controversial views, the Land Reform Bill that I am talking about and which there is polarised views in the political segment there. However, even setting it apart supposing that does continue to be contested quite hotly between various parties there I would still say that other things that continue to progress, the parliament remains as productive as it has been in the first phase and if you see some movement happening on goods ad service tax (GST), etc I would still view that as quite positive for the market. So, one is the reform related thing.

The second is the capex recovery that you need to see in the market and at least there are some encouraging signs. Activity levels on the ground seem to be picking up going by the M&HCV growth that you posted in FY15. Second part is in terms of power demand it has spurted by almost about 8 percent for FY15. So, these are very basic indictors that are showing some traction coming in to the economy. If all these coal block, spectrum block people who have won these things start investing to milk what they have won, hopefully that should lead to some kind of capex coming through apart from government sponsored capex on rail and roads.

Latha: I wanted to a look at another point in your recent report. You say that the year end calendar 2015 target for the Sensex is 30,100 so basically we will at best touch the highs we have already touched; we don’t breach the highs for the year? Is that your view?

A: It is a relative call vis-à-vis rest of Asia. Within Asia there are couple of markets that we are overweight in including China. We believe that we have already done five months of the year so expecting a 20-25 percent in a half year gone by kind of scenario is a difficult task. So that is where we are at this point of time. So, India is clearly something that is looking relatively better given the turnaround, the improvement in RoE and stuff that makes us constructive on it.