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Sensex can slip to 22K, FY16 GDP sliced to 6.8%: Ambit Cap

The Indian economy hasn’t yet touched its bottom levels, believes Saurabh Mukherjea, chief executive officer, Institutional Equities, Ambit Capital. Ambit has recently cut India’s growth forecast from 7 percent to 6.8 percent.

In an interview to CNBC-TV18, Mukherjea says India is currently facing a double whammy in the form of weakness in the home territory and uncertainity on China’s yuan devaluation and the US Federal Reserve’s hiking of interest rates.

The weak demand in Indian real estate makes for the trouble the Indian economy may face internally. With extremely low sales, realty is crumbling and it will have massive repercussions.  

By next calendar year, realty will see many downgrades. While the companies have started cutting prices in order to boost sales, the banking sector will face the brunt of it in terms of bad assets

Hence, Mukherjea advises not taking any speculative bets in the banking space and has lowered the year-end Sensex target to 28,000 from 33,000.

But lower levels of 22,000, he adds, are not inconceivable.

“With a high likelihood of the Chinese central bank embarking on a continued  devaluation of the yuan, the Indian stock market stands exposed to: (a) Indian products losing their competitiveness to their Chinese counterparts; and (b)  rising risks to India’s USD 0.5 trillion of foreign currency debt. Such a scenario could be a catalyst for more pullbacks in the Sensex with the trailing P/E multiple likely to drop to 14x (as seen in the Lehman crises), implying a Sensex level of 22,000,” states the report.

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

Latha: Ambit has reduced its gross domestic product (GDP) growth target as well as its yearend that is FY16 end Sensex target from 32,000 to 28,000. Can you take us through your argument first?

A: It’s a logic that we are highlighting in note. We have two different sets of adverse dynamics at play now. We have got the Chinese economy which is moving in a very divergent direction from the US economy and leaving aside the specifics of when America might hike and when China might devalue the yuan. That is a divergent movement in the two major global economies usually spells bad news for emerging markets. So, that’s one big dynamic that we are drawing our clients’ attention to.

The second aspect back home, closer home. There are several negative dynamics have played, not least a crumbling real estate market alongside and feeble banking system and consistent difficult on the government’s part to get reform moving in the parliament. So the combination as a result of us taking a very circumspect view on the domestic investment cycle, domestic capex cycle, we are cutting our GDP growth there from 7 percent for the year end to 6.8 percent largely driven by our very despondent view on the domestic investment cycle, capex cycle and that in turn translates into a more moderated view on the Sensex. So we are cutting from 32,000 at the yearend to 28,000 whilst highlighting that there is a reasonably high chance, high possibility of the Sensex going down to 22,000.


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