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Sensex 22,000 risk stays; keep away from capex plays: Ambit

Noted analyst Saurabh Mukerjea of Ambit Capital made a dramatic call two weeks back, when he said that even as the Sensex’s FY16 fair value was around 28,000, risks existed that could take it all the way down to 22,000.

Mukherjea is continuing to remain circumspect, saying contrary to consensus opinion, economic sentiment may be getting worse, which could take the market to 22,000.

“I have been doing a fair bit of travelling lately. My view remains that we are in a difficult economic situation where liquidity is drying up at different levels of economy. Cash flow is getting very tight for small business and there could be issues in the money market,” he told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy in an interview. “Overall business environment is deteriorating. It’s a matter of time before that feeds in into corporate results and GDP growth.”

Mukherjea, CEO – Institutional Equities at Ambit, said investors should stay away from the default economic recovery plays — stocks such as L&T, UltraTech Cement or ICICI Bank. He also said Ambit had revised down its earlier positive stance on the home improvement plays as it now expects the weakness in the real estate sector to further worsen.

“We are positive on companies that are either exposed to Indian exports or have a manufacturing story with not much exposure to core capex cycle,” he said. “Our favourite picks are stocks such as HCL Tech, PI Industries, Torrent Pharma etc.”

Below is the transcript of the interview on CNBC-TV18.

Latha: What do the market themselves look like? Do you think we should be using these dips to buy or are you getting a sense that we are going to get more attractive levels so sit on cash don’t put in all your money?

A: We last spoke it was too weeks ago; the first one day in September was when we last spoke and I think the point I had made to your viewers then was whilst fair value for the Sensex FY16. Fair value for the Sensex is somewhere around 28,000 is a host of factors swirling around India at the moment. Macro economic factors, political factors which create a real risk that the market will go, the Sensex will go all the way down to 22,000. I am sticking to that view.

Again, I have been doing fair bit of travelling over the last couple of weeks to Delhi, to some of the state capitals and my view remains that we are in a fairly difficult economic situation where liquidity is drying up at different levels of the economy. So, bank credit growth is obviously weak but even the small and medium-sized enterprises (SME) sector both in the formal economy and the formal SME sector cash flow is getting very tight for small businesses.

In the money markets we have seen what happened around that whole Amtek Auto episode. My reckoning is that we are likely to have more liquidity related issues in the money market as well. So, the overall business environment is actually deteriorating by the passing quarter.

Hence my view remains that from a fundamental stand point whilst 28,000 is a fair value the reasonable place for the Sensex to be at the year end there is reasonably good reason to be believe that we could go as far down to 22,000 on the Sensex. So remain circumspect just like we have been since February-March of this year.

Latha: You are not holding out any hope by the fact that the inflation number that will come today will be 3.4 percent or definitely less than 3.50. The Index of Industrial Production (IIP) numbers were better than most analyst expectations. The current account deficit for the first time I can remember the entire deficit is getting bridged by foreign direct investment (FDI). FDI was a fairly stunning 10.2 billion for one quarter. You had that massive rate cut coming from HDFC Bank as well so a further push from the Reserve Bank of India (RBI)? Won’t money get a little loser? Are things on the mend? Are we in the darkest hour before dawn?

A: At any point in time there is a bunch of high frequency data indicators; there is a bunch of macro developments which are reasonably positive. There is another set which is reasonably negative and it is always a tussle between the bulls and the bears. However, I look at the overall evolution of the data over the last six months. Our strong belief is the evolution of the data of the last six months has actually got progressively worst. Especially on corporate indicators leaving aside elements like government spends which has been broadly been to plan. The government has announced a two percent growth on the overall spending in the February 29th Budget and they have been sticking to their plan.

The government’s means are fairly modest and to be fair to the government they are sticking within their modest fiscal means. Overall if I look at the corporate mood music not just the larger corporate, mid corporate, smaller corporate, dealers and distributors and a whole host of sectors and we do a lot of work of this sort on the ground level. It is unquestionably some of the hardest times I have seen for Corporate India in the last 5-7 years.

I can’t remember too many junctures in the last 5-6-7 years well at the ground level of the economy the dealer distributor feedback the small business man’s feedback has been quite so grim. My reckoning is it is just a matter of time before that feeds in to even weaker corporate results and even weaker GDP numbers.

I know the consensus view is that growth will be higher this year than it was last year but for the last six months I have been emphatic and saying that looks highly unlikely. It looks highly unlikely that economic growth in the current fiscal will be higher than last year. Our view is we will get 6.8 percent economic growth in the current fiscal as opposed to the 7.3 seen last year. There is nothing that I am seeing at the grass roots levels of the economy which is suggesting to me the otherwise.

Interview transcript to follow.


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