In an interview with ET Now, Manishi Raychaudhuri, MD & HoR, BNP Paribas Securities, shares his views on their latest strategy report and talks about the market. Excerpts:
If I look at your latest strategy report and if I look at the fine print there, you have slashed your Sensex target for the year, you expect Indian markets to underperform and according to your report, there are high inflationary concerns which currently could hit Indian economy going forward. So, rather a bearish report?
You did not ask me a question, but I would still summarise what we have tried to say. In the near term, the Indian market is likely to underperform and by near term, I really mean about maybe 3-4 months, possibly till the October-December quarter. And yes, we have cut the Sensex target because there were a couple of variables on which we went wrong. We were clearly anticipating peaking out of inflation by some time in March-April, which did not happen. Inflation turned out to be a lot more stickier than we had anticipated and as a consequence, even the end to the RBI's tightening cycle, which we were expecting some time in the first quarter of this year, it now seems to be prolonged to sometime in the July-September quarter, maybe till around September.
So to that extent, we actually expect the RBI to tighten about twice more, maybe 25 basis points each. And to have the desired effect on inflationary expectations, it should perhaps be done in rapid fire succession in July and then again in September, which could obviously lead to some degree of underperformance. On top of that, we must not also forget that earnings estimates have been declining.
Our own EPS estimates for Sensex have declined about 4% since the beginning of the year, and we think that there could be another 3-4% downside to the Sensex EPS estimate for fiscal 2012-2013. Combined that with the valuations of India, which compared to India's own history or somewhere in the middle of the road, somewhere close to just lower than the average, but compared to Asia ex Japan and compared to China, they are at about 25-30% premium, which means that valuation premium has to compress.
This is our hypothesis behind arguing that in the near term there could be some underperformance by India. Having said that, I must also argue that by the time, we are in the last quarter of this year, some of these macroeconomic headwinds would be behind us. If the market does come down to a valuation level of close to maybe 12.5-13 times one year forward, that would be the right time to load into the high beta stocks among private banks, infrastructure and autos.
But what's your call, the prognosis is generally once inflation peaks out, the market bottoms out and since that process is now elongated with the recent fuel price hike, inflation is not going to becoming down in any hurry. So what's your call on banks and the entire rate sensitive basket? Would you be a buyer?
First of all, yes, inflation has been elongated. The longevity of high inflation is possibly till about September-October. Till then WPI inflation would remain in the present range that we are seeing that maybe in the range of 8.5-9.5%. Secondly manufactured product inflation, which has been increasing now over last 2-3 months, will be possibly on an upswing till about September-October. After that, the effect of recent decline in commodity prices would begin to catch in and possibly manufactured product inflation would be peaking out by sometime in October.
Now as a consequence, we are kind of neutralist, we are kind of fence-sitters on the rate sensitive pack. Now here again it is essentially stock-specific weight which add up to the sector weight. So we are neutral on both banks and automobiles. In banks, we prefer the private sector banks. In fact, we have closely about 25% weight on the banking sector as a whole and out of that, about 80% of that is in the private sector banks with much smaller weight on the public sector banks. Because we think the private sector banks have relatively lower concern about asset quality and among them the high CASA banks, which have a very strong liability franchise or possibly those, which would be able to weather the storm of net interest margin compression a lot better than the sector average. We are also neutral on the auto space where we have actually cut down weight significantly. We only have the consumer autos in the portfolio, the companies that are engaged in two wheelers and the passenger cars not so much in the commercial vehicle space.
Given the way how commodity prices have corrected in last 10-15 days, is that not a positive but more like a short-term negative for Indian markets because that will also hit earnings and profitability for commodity companies?
Yeah. Paradoxically it is a positive for Indian economy, but perhaps in the short-term a negative for the Indian markets because that's the peculiar structure of the Indian equity market. While the economy tends to benefit from commodity price decline, both metals and oil because we are large importers and as a consequence, both fiscal deficit and current account deficit tends to decline. But if you look at the equity market, close to about 30-35% of earnings stream is somehow related to the global commodity prices, be it in metals, oil or petrochemicals. So paradoxically the commodity market declining tends to lead to some underperformance of Indian equities. This is something that we had seen in 2008 as well. The oil and metal prices came down so sharply by late 2008 and early 2009 that the Indian equity market faltered and it fell by almost 60% from the peak, but actually the economy was not doing all that badly at that time.
What's your call on ONGC post the latest news from Cairn and Vedanta and how it may be beneficiary to companies like ONGC?
We think that there are signs of the Cairn-Vedanta deal getting finalised now. We think it is positive for ONGC. So for ONGC, essentially two positives have kind of got coupled in a matter of a couple of days both the government's decision to increase the oil and other oil product prices. And the possibility of the Cairn-Vedanta deal getting finalized. So we are actually positive on ONGC after these two developments.
Give two high conviction investment ideas?
I would suggest that under the current circumstances, No. 1, one should stick to the consumption theme because pretty much everything, be it income stability or the government's programmes, seems to be supporting consumption a lot more than supporting investments. As a consequence, I would recommend Bajaj Auto under the current scenario. The stock has underperformed because of the concerns relating to the longevity of the DEPB scheme, but we think the fundamentals of that company are much stronger. So Bajaj Auto would obviously be one of the choices at this point.
I would also in a similar vein recommend Bharti, Bharti Tele-Ventures, because revenues in the telecom space are becoming a lot more visible and stable. On top of that, the domestic pricing war scenario, which we had encountered a few months back, seems to have almost come to an end and as a consequence, the revenue growth and earnings growth of the companies are getting more linked to subscription, the number of new subscribers and so on. So the telecom space and the two wheeler space look good under the current circumstances.
Why Bharti now? The stock has already appreciated by 52% in last one year.
First of all I must say that we have had Bharti in the portfolio not now but for quite some time, almost for more than a year. We have captured a significant part of the upside. Having said that even after this upside, Bharti remains one of the best cash generators in this business. Bharti remains a stock where the earnings stream and revenue stream are possibly visible. Under the present circumstances where you have a degree of uncertainty about capex and the investments, it is possibly better to look at the consumption-orientated stocks. So in the present uncertain phase of the market as long as this continues, stocks of this type, of the kind that Bharti represents, would possibly continue to be outperformers.
