Anish Damania, Business Head-Institutional Equity, Emkay Global Financial Services Ltd.
What is your Sensex target by December 31, 2012? Why?
While we have not yet fixed the target for the Sensex for December 2012, our recently released strategy note argues for a Sensex target of 15000 for March 2012. We believe that the downgrade in earnings will continue through the next six months at least. Hence, the market will continue to remain under pressure, notwithstanding strong bear market rallies. We have based our target on the matching concept between earnings yield (7.5%, this is the inverse of PE) and 1 year government bond yield (risk free) at 8.5%. Hence, to level either the market has to fall by 12% or government bond yields have to fall that much. If there is any global crisis, then situation may be worse.
How much downside you see for Sensex and Nifty from present levels? By when do you think market will bottom out?
While in the immediate one month we expect a strong bear market rally, the market may bottom out close to a nifty level of around 4200, at which it will start looking attractive. In our view this should happen in 1HCY2012.
What is your Sensex EPS estimate for FY12 and FY13? What are the possibilities of this estimates getting revised?
We do not cover all the Sensex stocks but derive our basis from consensus. We believe there exists a 5% downside risk to FY12 estimates and around 10% risk to FY13 estimates.
Which are the three large-cap stocks you will recommend investors to buy at current prices for 2-3 years time horizon? Please give a brief rationale for your recommendations.
One stock which comes immediately to my mind in the very large cap space is Reliance Industries. Its near zero debt status, single digit PE multiple and the continued underperformance over the past two years means that a lot of concerns are priced in. Given its current valuations, the risks to downside are significantly lesser in Reliance than in many other large cap stocks. Further, it will be a primary beneficiary of rupee depreciation since almost all of its businesses are linked to dollar realization. The other stocks which we like are HDFC, LIC Housing Finance as secular long term stories. We believe that the next bet would be on cyclicals and bombed out asset plays, however we are not there as yet.
Which are the stocks/sectors you will avoid in 2012? Why?
Increasingly, one has come around to the belief that domestic consumption stories will be hurt significantly during this year as the economy slows on both sides..manufacturing (output slowdown)as well as agriculture (price fall). Because of this, the domestic services sector is also likely to slow. Besides, these stories have been commanding rich valuations as till now these stories carried minimum risks to their earnings growth estimates. Besides, we will continue to avoid capital goods (don’t expect pick up in investment cycle) and banks (domestic risks will heighten asset quality concerns)
Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?
There has been complete policy inaction over the past one year coinciding with the break out of the first scam. If there is consistent improvement in taking positive policy actions (and not vote bank politics), it would indeed be a positive trigger for the market. Further, interest rate hikes to control inflation have put downward pressure on demand growth. Though we believe that interest rates have peaked out, till the time they fall at least 200bps, we would not be greatly enthused. However, post that market earnings yield may begin to look attractive.
We have a large energy security issue and now its coming from three directions..oil, coal and domestic gas production (lowering of output). Any change in dynamics of at least two of the three issues, it would be a positive for the market. It would imply that oil prices should fall at least 25%-30%, coal availability from local mining to improve or international coal prices should fall. Recovery in domestic production of gas would be involve a longer gestation but if steps are taken in the right direction there, then it would be a positive trigger.
Rupee has fallen 20% against the US dollar this year, affecting stock returns of foreign investors. How will this impact the market outlook for 2012?
Outlook will continue to remain cloudy on this account as factors leading to the depreciation of the rupee are unlikely to subside in a hurry. Higher fiscal deficit, higher trade imbalance (deficit), government policies and possibility of international shocks especially from the eurozone continue to remain the key concerns.
