Rahul Arora, CEO (institutional equities), Nirmal Bang, spoke to Puneet Wadhwa about the result expectations for the March quarter, FII flows, impact of rupee depreciation and top picks in the current market. Edited excerpts:
How do you expect the Indian markets to pan out in the March quarter, given the upcoming RBI policy review and the Union Budget?
The year gone by has been tough for the markets, which have lost 25 per cent, even as stocks are down much more. The mid-caps, being totally decimated, are a different story. I think pessimism is at its highest right now and the bias for the March quarter will be that it would remain lower. We retain our view of 14,700 and 4,400 for the Sensex and the Nifty, respectively for that period.
Have the markets factored in the worst on the macroeconomic front?
The borrowing programme continues to widen and the rupee continues to hover around 52-54. And, with the fiscal deficit almost certain to be around 5.5 per cent, the macros for the next three months don’t look too exciting. If you assume the Lehman crisis to be a benchmark of how low the valuations can go, there is a risk that 4,400 on the Nifty can both be be tested and broken on the way down in the first quarter and the first half of 2012. The market might latch on to a cut in interest rates — as and when they happen — as a positive, but it remains to be seen how much of a rally, if at all, it could result in.
What does 2012 hold for the Indian markets with respect to foreign institutional investor (FII) inflows?
That’s going to largely depend on the global front. If the situation in Europe continues to be as bad or worsens, it would be hard to imagine monies coming in from that part of the world. Since the US downgrade by S&P, the Dollar Index has run up from 74/75 to nearly 81, clearly indicating that the dollar is viewed as a safe haven even in times of crisis (in the same period, gold fell about 20 per cent).
So, if the situation worsens on the domestic front, it may cause capital outflows. Areas of concern include slowing growth, lull in investments, no signs of reforms, a widening current account deficit, roll-over of short-term forex debt and the likelihood of rupee depreciation.
Given the prevailing market conditions, how have you reshuffled your portfolio? Which sectors/stocks are you bullish on from a medium-term perspective?
We would be positive on defensives like FMCG and pharma. The information technology (IT) sector would be a clear beneficiary of a weak rupee. ONGC, GAIL, HDFC Bank, Sterlite and Sun Pharma are some other stocks we recommend for 2012.
More From This Section
Is it a good time to invest in mid-caps? On which sectors/stocks are you bullish on in this space and why?
If we say that the first quarter/first half of the year could see a roll over of the 2011 pessimism, the mid-caps will certainly be in the firing line, as seen in 2011. Even as we think valuations in the infrastructure sector for stocks like IRB Infra, GMR Infra, IVRCL Infra look good, we also recommend buys on Bata India and JBF Industries.
How do you see the December quarter results panning out?
Margin pressures will continue in the manufacturing sector, interest costs/forex losses will still hurt and we will see continue to see significant earnings downgrades in FY13. Downgrades of 10-15 per cent are likely in FY14 as well.
IT could be a beneficiary on account of the rupee depreciation and FMCG should be strong, but apart from that, I am not too optimistic on the Q3 earnings. Banks will also be under pressure on the non performing assets (NPA) and net interest margin (NIM) front. On the top line, too, there is evidence of credit growth slowing.
The rupee has seen sharp depreciation in the recent months. How do you see it panning out in the near-to-medium term?
The currency pressure will continue and the current account deficit situation will either remain as bad or worsen, as the regulators and policy makers are unable to create an environment conducive to attracting capital flows into the country through FDI/FII investments. A lot needs to be done on both counts, something which doesn’t look likely right now. I won’t be surprised if the rupee depreciates to the range of 55–57 this year.