Stock markets in India and abroad have been choppy in the recent past. Saurabh Mukherjea, head of institutional equities at Ambit Capital, speaks to Jitendra Kumar Gupta on the likely impact on domestic markets and the near-term outlook. He feels it is too early to take a call on earnings upgrades and mentions his top picks. Edited excerpts:
What is your assessment of global developments and their impact on Indian markets?
It is relatively clear the western economies are entering a multi-year economic slump. The only way for policymakers to support these economies is more monetary support. This will also open a window for hedge funds and others to access cheaper money. The liquidity could also flow back to the Indian market. Hence, as the dust settles, India would be a net recipient of FII (foreign institutional investor) money.
But, the appetite will be for high-quality companies. Investors might not risk their money with companies which do not use their capital efficiently. With the economic environment becoming difficult, investors will be more willing to invest in companies which generate good cash flows, have strong balance sheets and strong corporate governance.
Your near-term view on Indian markets?
There is not enough clarity at this point, given the sheer number of global uncertainties swirling around us. It is difficult to expect a broad-based economic recovery in India, especially given the dismal outlook for economic reform and the structural inflation challenges. Correspondingly, it is hard to see why the Sensex might not go back to its previous 18,000-19,000 levels in the near term. It is better for risk-averse investors to focus on high-quality and defensive stocks.
Could there be earnings upgrades over the next two quarters, with commodity prices softening and most economists expecting RBI to pause its rate tightening?
There are many unknown global macro factors. For instance, on the one hand there could be a large impact on export-led sectors like IT. On the other, the companies might benefit on the fall in commodity prices. In this light, it is not possible to take a call on the earnings, which could come under pressure in the adverse situation. Hence, we are sticking to our existing Sensex EPS (earnings per share) target of Rs 1,160 for 2011-12.
As a portfolio strategy, what would you advise?
If you are a conservative investor, who does not want to see losses in his portfolio, you could look at some of the defensive sectors in the near term. Investors with some appetite for risk, who can bear short-term losses, can look at cyclicals such as the automobile, banks, information technology, realty and power stocks. In the mid-cap space, we like companies such as Adani Power, HCL Tech and Exide Industries.
Tell us more about these companies.
Adani Power has one of the best execution track records and minimal exposure to merchant power, at 18 per cent, compared to 30 per cent for peers. Besides, it has high visibility in terms of fuel, given that it has 100 per cent fuel linkage for power plants getting commissioned until 2012-13.
In the case of HCL Tech, it has a best positioned long-term strategy, with a well developed, consulting-led, enterprise application services business that is likely to drive long-term growth, and the strongest presence in remote infrastructure management, the least penetrated IT service line.
Exide is a good buy at the current prices, given its product profile and positioning in the industry. Also, the falling commodity prices mean the company will benefit on account of lower input prices and improve operating margins.
