Speaking to CNBC-TV18, Sandeep Bhatia, Head Of Equity, India at Macquarie Securities Group said the market is seeing a lead-and-lag phenomenon, where bottom up stock picking approach should be preferrred.
With underlying growth of at least 6.5 percent and earnings growth of 10 percent in FY17, the market should turn for better in next fiscal. Since the market can easily have bad days with a possibility of 4-5 percent correction, one should use the dips to add company’s with sound management and a moderate expectation from earnings. Even for the midcap, quality of management and a steady structural growth should be the criterias to buy.
With FDA overhang being ever present, one must tread the sector carefully. He says Sun Pharma has been the top pick of Macquarie for quite sometime.
Below is the verbatim transcript of Sandeep Bhatia’s interview with Reema Tendulkar, Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Sonia: How has the feedback of the conference been so far and what is the mood looking like?
A: The mood on the conference is fantastic. We have over 250 clients come in. Half of them are international clients. So it is a good mix of large international and domestic clients.
Clearly, the mood at the conference is a bit circumspect. The environment outside of India is clearly a lot of uncertainty, a lot of international geopolitical issues. Here in India we have gone through elections, we have gone through the result season, earnings growth is still to come. So clearly the focus of investors is primarily on stock picking. Most of this year is fully discounted.
So to that extent, I think the top down story is well known and fully priced in the market. So where the money is to be made is bottom up and that is where investors are focused on.
Anuj: Explain this dichotomy, we have had your conference and a couple of other conferences and we are getting to know that the investor participation has been the highest that we have seen over last many years but over the last few days what we have seen is consistent foreign institutional investors (FIIs) selling. Even if it is a bottom-up stock picking market, why are we seeing this kind of large FIIs sell number, is it purely an EM phenomenon or is it something more?
A: The flows which are happening and the investor participation, which is happening is a bit of a and lag phenomenon. So if a lot of conferences are happened, if a lot of investors are coming in, I would take that as a leading phenomenon and if these various investor visits and conferences are successful, the flows should come in six months or so.
The numbers that we are seeing right now is mostly are lagging phenomenon, a result of what has happened globally, what is happening with currencies in emerging markets, the kind of disappointments that India has had in terms of its own earnings growth and gross domestic product (GDP) growth and investment trajectory — so a lot of things that you just mentioned negative flows are definitely there and it may continue for the next months too. However, the investor interest remains high primarily because is still an island of growth, India is still an island of stability, India is still an island of hope. So to that extent, that is why we are seeing a lot of investor interest across all conferences. So it is mostly a lead-and-lag phenomenon.
Reema: What are you telling all these corporate and investors who have come to your conference? How is 2016 going to be because this year has been a wash out, the Nifty has lost 6 percent already on a year-to-date (Y-T-D) basis, the earnings cuts continue, so how do you expect the equity performance to be next year for the index as a whole?
A: We are looking at 10 percent kind of trajectory in earnings growth and while you may be right to say that compared to the expectations hope and hype of this year, it has been minus 6 percent outcome till now. Therefore you would characterise that as a wash out.
However, if you look at what has happened in India relation in the context of the entire world and especially the emerging market economies, India still seems to be an island of stability — a large big country with underlying structural growth drivers of at least 6.5 percent if not more.
So to that extent, next year again it depends upon what expectations are being set. I would set a 10-15 percent kind of earnings growth trajectory and we are already very conservative with 10 percent kind of trajectory. So the room for disappointments from hereon is definitely going to be much lower and to that extent, the market should trend better in terms of overall outcome than the current year for next year.
Sonia: This year has been full of disappointments in the sense the very sectors that did well in the first part of the year like pharmaceutical and IT are starting to come off quite a bit of the latter half. What do you do with companies like these where the quality of the management is top class but now there are some USFDA issues, concerns, financial irregularity concerns that are cropping up, do you keep the faith or do you start to get a bit cautious?
A: We like Dr Reddy’s but our top pick in the pharmaceutical sector has been Sun Pharma. Both of these stocks have had major corrections recently. In fact, these are opportunities for any investor who has more than a year’s timeframe to look at entering these businesses.
I am unable to comment on the breaking news and the direct impact of that but our analyst is talking about over the last one month to wade through these issues, which are happening in Dr Reddy’s and we still have a positive rating on the stock.
So to that extent, we like Sun Pharmaceuticals . As far as the sector is concerned, we should be selective because I think for the pharma sector, the event risk of USFDA is ever present and we have seen a lot of companies go through that and some of the remaining companies, which were untouched, are also now witnessing same pressures. So use good managements and bad news to buy a stock that is always a wise decision.
Anuj: Just to carry forward that lead-and-lag point forward since market normally is ahead of factoring in earnings growth or degrowth, by when do you think this texture of market of being only bottom-up stock picking and not doing anything on index change because that matters a lot for retail sentiment, that matters a lot for overall equity cult. By what time do you see a bit of a pick up in earnings and when do you think the market should start to factor that in?
A: We are talking about the moderate pick up in earnings growth. We are talking about a 10 percent earnings growth for FY17 and we expect that to be picked up probably once we see the full year probably after March 2016. We have seen a bit of that happening in a couple of banks, which used the last quarter to come up with some numbers which showed losses. I would think the full year of March 2016 companies will probably again want to take a decision and therefore the broader index rebound should happen once we go through the reporting season which is probably after June of 2016.