| Global, domestic cues weak | |||
| 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 it," 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. More to follow | |||
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