Bears took complete control on Dalal Street on Friday with the equity benchmarks falling more than 3-month low, largely due to selling pressure in Infosys post disappointing Q4 earnings. Sensex lost 297 points to end at 27438 and Nifty managed to close above 8300-mark after hitting an intraday low of 8273, down 93 points to 8305.25 – the lowest level since January 14, 2015.
Speaking to CNBC-TV18, Sanjeev Prasad of Kotak Institutional Equities said in the last one-three months India has been of the worst performing emerging market year-to-date whereas a lot of other emerging markets have given decent returns of anywhere between 10-15 percent. Therefore, there could be a rotation happening out of India, he cautioned.
According to Prasad, both the minimum alternate tax (MAT) issue and forecast of weak monsoons have clearly affected the market sentiment.
“On one side you have expensive valuations, downgrades in earnings, economic activity not picking up that is the more fundamental reasons for correction which we are seeing now. Secondly, you also have some amount of technical issue in the sense that people have started looking at other markets more favourably compared to India,” he added.
On specific sectors, Prasad believes IT could be a defensive at current levels led by massive correction in the stock price over the last 7-10 days. He, however, expects some more correction in consumer staples and pharma.
Below is verbatim transcript of the interview:
Q: It has been a very disappointing week for the market, not just this week but week gone by as well. What are the places to hide in this market or do you think the best thing to do would be to up your cash levels now?
A: Hiding places are some what tricky to find because if you look at the traditional defensives such as consumer pharma names they are pretty expensive. You look at any decent frontline consumer staple stock it will be trading at more than 30 times March 2017 numbers after building in two years growth in March 2016 and March 2017.
Similarly, you have seen for pharma and you have seen the way pharma stocks have corrected over the last 7-10 days just given a bit of miss on earnings expectation there.
IT could have been a defensive; at current levels may be the worst is there in the stock prices. It is one area you could look at more strongly now that we have seen a massive correction in the stock price over the last 7-10 days.
The other one you could look at is private banks which haven’t done much over the last three months. They have been in a range; in fact ICICI Bank has come down about 15 percent on a calendar year-to-date basis, trading at about 1.92 times as per March 2016.
Axis Bank is about 2.5 times and so, the valuations there are looking a lot more reasonable and it would act as defensives.
Over the last two-three weeks we have also been pretty worried about the market. We have been highlighting our concerns, searching for some sort of hiding place and that is one of the reasons why we increased the weightage in some of the stocks such as ITC , Reliance that were very big underperformers over the last year or so. They have done their job but the others that were looking as good defensives have actually corrected significantly now.
Q: You speak to a lot of foreign institutional investors (FIIs), what is bothering them because if you were to adjust for the Sun Pharma deal you have seen quite a bit of secondary markets selling and that has impacted the currency as well. Do you think this is minimum alternate tax (MAT) issue, the earnings issue or just normal routine profit taking, no more no less?
A: It is a combination of several things; the first thing is the expectation which was there that India will start seeing economic recovery two-three quarters after the formation of the new government that is not coming through.
Every company you speak today is talking about recovery may be three-four quarters down the line. So clearly FII investors are taking some what negative view on that. Patience is running out to some extent.
Linked to that is the fact that you are constantly seeing earnings downgrades. If you look at fiscal 2015, at the beginning of last year around April 2014 we were looking at somewhere around 15 percent growth for fiscal 2015 and net profit growth for the BSE 30 Index that has come down to about 2 percent. Earnings numbers are not coming through and the market is looking expensive with every cut in earnings numbers.
Thirdly, you had seen a big re-rating in the market; valuations had gone up significantly on expectations of earnings coming through. And now that earnings are not coming through valuations are no longer supported by earnings and so, the valuations are given way to some extent.
The final point is more linked to global macro and also what is happening in other emerging markets. The problem is many other emerging markets have started very well.
In the last one month or last three months, India is probably the worst performing emerging market year-to-date in fact it is negative now. Whereas a lot of other markets have given decent returns of anywhere between 10-15 percent in some cases and so, there could clearly be a rotation happening out of India.
You know three months back all of us wanted to believe that India was the only good emerging market to be in that is clearly not turning out to be the case. Finally, the MAT issue, forecast of weak monsoons all that has clearly affected the sentiment.
On one side you have expensive valuations, downgrades in earnings, economic activity not picking up that is the more fundamental reasons for correction which we are seeing now. Secondly, you also have some amount of technical issue in the sense that people have started looking at other markets more favourably compared to India.
Q: Anecdotally, this market has kept rewarding some of these high quality names with high valuations except for the last two or three months. Do you think that will still remain the case and that is why some of the pharma names could have become a good buying opportunity now after the kind of correction that we have seen? Do you think now we have reached a stage where valuations will begin to matter quite a bit?
A: No, clearly your second point is absolutely valid. Valuation will matter. Over the last six to nine months many stocks were not running on fundamentals in the sense many of them just got re-rated upwards without any real change in the earning numbers.
If you look at any consumer name or pharma name, I don’t think we have seen any real earnings upgrades there, but the stocks got re-rated anyway up from 30 to 50 percent.
There is no real underlying logic for the stocks to have gone up so much, but now that the stocks have started correcting people are looking for a reason as to why they are correcting when they went up.
Nobody really questions why they are really going up in the first place. So a lot of this entire re-rating was driven by one thing, expectations of a quick turnaround in the Indian economy which will lead to volume recovery and so on and so forth which is really not coming through. People have started to question this whole recovery in India etc.
Also, there was a global trade where you saw very low cost of money everywhere, lot of money being printed up out of Bank of Japan and European Central Bank (ECB) which had to go somewhere because the yields were very low everywhere in the world.
Therefore, people started giving very high multiples for essentially the same earning numbers and now since people started to recalibrate the earnings growth in India the economic activity recovery in India, reforms process suddenly you will start seeing multiples starting to correct to more rationale levels.
If you asked me whether the correction is done in high quality names the answer is probably no, you could see some more correction in the likes of all these consumer staples and the pharma to more rationale levels.