Shankar Sharma speaks at ET Now........

Sensex may swoon to 12K level: Shankar Sharma



17 Feb 2010, 1446 hrs IST, ET Now



ET Now caught up with Shankar Sharma, Vice Chairman & Joint MD, First Global to seek his views on where the markets were headed in 2010 and which stocks could be an attractive bet. Excerpts:
Where do you see the markets heading where in a surprising pullback, we have broken that resistance level that we were tracking. We are past 4900 on the Nifty. Do you actually see the markets witnessing a further correction in 2010 and what kind of returns do you expect from equities, especially in emerging markets?
The pullback was very much in order because we had sold off from 17,500 to 15,500. It can easily pull back another 200-500 points on the Sensex.( He puts just 500 point more means 170 points more on Nifty) This year is the down year for equities and within the context, emerging markets will do worse than the US markets. The markets that did really well in 2009, that is the BRIC pack, will actually underperform the markets. The markets that did not do that well, like Taiwan or South Korea, have relatively more stable markets than the volatile BRIC pack markets. Overall, this year is the down year for equities by and large.
When you say a down year, what kind of correction do you see both in the short-term and in the long-term?
In the short-term, we definitely do see the markets in the first half coming down 20-30% from the highs of the year, which was 17,500. The markets could easily go down to 12,000-12,500 in the first half and from there, I suspect there will be some measure of recovery. Markets could still ultimately end the year down 10-15% from the close of 2009 which may be around 16,000, but that is a long call or a long short to make just yet. For now, markets are headed lower. However, once they have reached a certain level, then we will see if things have changed enough for them to rally all the way back to close enough to the levels of 2009 December.
Do you think that's going to be a valuation call or is it going to be liquidity driven because we have also just had news that LIC would be pumping in another Rs 15,000 crores by the end of March and other insurance companies are waiting to put more money in. Also, FIIs are bringing in the money. Do you still see corrections coming in?
When the markets sold out 2000 points, the money was still there. These are facile arguments that liquidity ensures the markets will never fall. Throughout the history of the world, there has always been liquidity chasing markets and not markets chasing liquidity and that's the way it is. If the markets have to fall, they will fall. It does not matter whether LIC puts in $2 billion or everybody in the whole world puts in money. I do not waste my time looking at liquidity at all, it makes no difference to broad market trends at all. It might make a difference to thinly traded Z Group stock but other than that, I do not see that being a factor. The overall situation globally is probably headed to be a lot worse than what we saw in 2008. At that time, particularly the second half, we saw the collapse of one investment bank which was not a huge investment bank by any standards, compared to the top 3-4. It was a smallish bank but that itself was large enough to bring down markets substantially and shake the entire world financial system.
The southern rim of Eurozone and Ireland on the north end are looking in absolutely terrible shape and in reality, nothing really went away by way of the problems. We just applied band-aid on the problem and globally the central banks were focussed on only one thing that was to supply enough liquidity to engineer a stock market rally, which would somehow lull us into believing that everything that was bad had actually gone away. In reality nothing actually went away, they were pretty much there, they were hidden by a coat of band-aid and now the band-aid is coming off. ( Here I think Amit need to read this.SS says that liquidity has nothing to do with market going up....but his chartist friends one arguement is that due to liquidity market went up)


What about this classic domestic consumption story that India is very well cushioned? We have already seen very strong IIP numbers, the best in a decade. We are expecting GDP next year to be good, forward earnings multiple for the broader indices at anywhere near to ballpark figure of 15-16. Do you think that's not good enough for our markets to see a base being set around 15,000-16,000 on the Sensex?
If you go back to March 2009, people were predicting 20% earnings growth for 2010 March end. As it turns out, we have ended up far short of that. By our reckoning, we had an aggregate of may be just 2 or 3% growth for this year. That is terrible by any standards. You are coming off the low base of 2009 and on top of that, you are tagged on just a mere 2 or 3%. I do not see on what basis I can say that we will hit 20% earnings growth in 2011, which will suffer because of the relatively higher base of 2009-2010. A lot of the earnings growth starts out at the nice cosy figure of 20% and by the time the year kind of begins to come around to the end, the numbers keep getting adjusted downward to probably meet more realistic numbers. We started even the last year on a nice 20%, we ended with 3%.
We are starting again this year with 20%, we will see where we end but my sense is that there is room for disappointment on the large parts of the market, particularly in the areas wherein you had people raising a lot of capital and that's the one big area of the market and which actually is a large part of the market wherein you will see that multiples are still very high, they still have 20-25 times earnings. All infrastructure companies irrespective of the fundamentals are trading there. I can easily see them trading at 15 times earnings and also the metal stocks in light of China tightening and trying to rein back domestic credit growth. In light of all that, I cannot make the case that commodities are headed substantially higher. If you put all that together, I do not see from where 20 25% earnings growth can materialise. If it were to do that, that would be surprising. That can happen but I suspect the probabilities are quite low.
It is interesting that you see this year's earnings being at 2-3% growth. Most of the other brokerage targets that we are dealing with are clearly much higher. How do you peg it at such a low number?
That is a separate discussion and for that, we have to go sector by sector, company by company but lastly the point I was making was that you are ending up with a situation perennially that India is totally correlated with the world. If globally things turn bad or good, domestic markets follow. We have seen that for the last 10-13 years, right from the Asian crisis. India is completely tied and completely integrated with the global marketplace. Even if the domestic economies are not correlated, the markets are correlated. If globally situation turns bad and I think it will, I cannot make out the case that India will standout and go to 21000 while the rest of the world is selling off 25%.
There are some reports coming out where various international brokerages are saying that India, out of the emerging markets, will probably see a further correction than some of the other markets in the region. Would you agree with that view and why would that be?


I pay no attention to what other brokerages say. That is not a determinant of what our take is. Our take is that EMs in general are looking to correct substantially because EMs are the high beta end of the global markets and whenever you have a global market sell off or a rally, EMs perform better or worse by way of their being higher beta than what the global trend is. If global markets are rallying 25%, EM will typically do a 35-40% up. If global markets are selling off 25%, the entire EM pack will fall may be 35-40%. I do see the global situation being very precarious and in context of that, EMs are trading at an all-time high weight in the global indices and that's the biggest area where people can take off money if there are jitters on the global front and that is clearly something more than just jitters now.
For sometime now, we have been moving in a range and there was not even too much expectation of a pre-budget rally. Yesterday it is surprising that we saw somewhat of a pullback rally, we have broken resistance as you were just talking about. What are your expectations? Do you think we might actually see a pre-budget rally? Do you think markets are expecting too much from the budget and will there be a knee jerk reaction post the budget if perhaps those expectations are not met?
I do not know, I have no expectations. I have never had any expectations from the time I was born for this thing called the budget because it is just all guesswork unless the Finance Minister is my buddy and he keeps telling me what proposals he is going to come out with. I see no reason to waste time on speculating what will come in this budget, so I pay no attention to that. What I do know is that statistically markets do sell off post budget rather than rally post budget. There have been a few exceptions but more than 80% of the time that's the trend. I see this year as being no different.


How would you play these markets? They are looking set for a downward correction but sectorally, where would you be overweight still?
We have been overweight on pharma as well as the auto pack and IT pack. On IT, our concerns have emanated just now post Obama's talk on imposing some kind of an offshoring tax or whatever he calls it. If that were to come true, then that sector can really hurt. We would be a tad cautious there but we are not downward negative. It is just that there is room for caution there. Within the context of whatever else we see, these three sectors still look the more secure places and autos continue to do well. I have no reason to doubt, at least the macro numbers on autos will be good. Even though within that you might see little bit of margin compression or because of higher competition, some price cuts being taken by the leaders or because of higher steel prices, you might see some margins getting squeezed. But by and large, that is a sector we have reasonable comfort on by way of the numbers at least, the headline numbers still look very good.


What about pharma, how would you play that? Would you be looking at the generic space, would you be looking at the formulation space or the cram space? Where is it that good money can be made now?
Most of it is again going to move as a pack. Within this space, we have liked the large cap pharma, but of course, we did like some of the second tier ones like Orchid etc which had a reasonable run. This is a sector where you buy when you have nothing else to buy because most of these companies have reached a reasonable level of maturity and they may not have huge blow out growth numbers. In context of where the markets are going, this sector does offer comfort. Of that, we like the fallen angel which was Ranbaxy. Having doubled, I doubt if there is a great deal of upside left in this stock. Although, I do not think it can go back to Rs. 250 that easily but but this is a space that will not fall as much as the rest of the more volatile sectors or the high beta sectors. It is more of a defensive call rather than the desire to make actual absolute returns in a lot of these stocks because I doubt if that is really going to come through that easily. Unless you buy unloved ones like the Ranbaxy, Orchid and Sun Pharma of the world, I doubt if you will make a huge amount of absolute return but you will definitely make outperformance returns.


What do you feel is overvalued right now?
The entire infra realty and metal space definitely looks overvalued. A lot of metal stocks are trading at markets caps higher than their market caps at the peak of the cycle and I see no reason to make out that case just yet. Infra, metals, realty have plenty of room on the downside. To some degree, I would probably put even banks in that category because looking at the inflation situation and looking at the fact that credit growth may not be as good, some of the valuation on the banking space do not look that attractive now. These are the sectors that you would probably want to be more cautious on rather than the ITs and the pharmas and the autos.


What about the smaller sectors like aviation, textiles? We have also seen logistics perk up, some of those stocks that are exposed to the railways to a certain extent. Any of those look interesting right now? Also, what about the smaller metals space like pipe manufacturers because this is a space which has not moved up just as much as in terms of valuation as the rest of the market has?
I do not look at small caps, so I really cannot comment on a pipe manufacturer or anything of that sort. Aviation looks interesting. Aviation stocks have done well and the traffic on that front looks again like the auto story. It looks to have reached a certain level of momentum which will not be very volatile on the downside at least. That space looks good and our take is that oil prices are definitely going to go down over the next six months time. There will be no real upward risk on price of fuel going up for these carriers. Aviation looks definitely very interesting but I have no take on the other smaller sectors you mentioned.


What about oil and gas and this whole big thing about the Kirit Parikh Committee report, the subsidy burden? In today's Economic Times we have Mr. PMS Prasad's speech saying that price deregulation needs to be the order of the day. You think it would be a good play? You think if this is something that might happen in the next one year?
I pay no attention to all these committee reports. Again they have been coming from the time I have been born. They will keep coming till the time I depart from Mother Earth. So by and large, ultimately it is the Prime Minister's call and that will be a political call. Subsidies should not be removed in the entire sector. Subsidies in general should not be removed whether it is for fertiliser, whether it is for food or whether it is for oil. Subsidies should remain because that is a huge buffer that the government provides to citizens of the country that it will take the burden off price fluctuations onto itself at least to a very large extent and not burden us with those fluctuations. If subsidies were to go and consumers, whether it is industrial or individual, were to start paying market risk with everything, consumption in India would drop through the floor and I do not think that is a very very palatable thing at all. It is better if the big brother takes deficit on its books and leaves the consumer's balance sheet intact rather than shifting its deficits onto consumer books. I am a big believer in subsidies and that is my position on that.


In a falling market, do you feel anything is a value buy at this point of time in the heavyweights that you focus on?
The sectors look good because they have value. If you just take an example of Bajaj Auto. The stock has done very well and still continues to look very reasonably valued. I do not think you can find too many quality companies of that pedigree trading at the valuations it is and given the growths that it is delivering. Bajaj Auto is quite inexpensive, the stock has done well and despite doing well, the stock is still inexpensive, that is a surprising thing.

Talking about falling stocks, we have not discussed Bharti Airtel, trading at 275-280. Of course it has recovered from those lows but do you think it is a value pick now?
This is a sector we have been negative on from 2007 end, if I recollect correctly. The first round of shock from the sector came by way of the tariff cuts. Once the cosy monopoly went, new players came in, they had to grab market share from people. Market's growth while it is there, it is still coming at the low end of the spectrum by way of the ARPUs, so they really have to scramble to take high value customers or high paying customers away from the incumbents which is offering very very attractive rates.
That was the first round and now the acquisition led growth that companies want to go in for because they see their own growth slowing down, that is again the second fairly predictable outcome. This you could have predicted two years back. It is my belief in general that acquisitions do not typically add value. Maybe one out of ten do, but by and large, usually companies blow up a lot of good money on assets that in hindsight should not have been acquired. In India itself, we have seen many examples of those things happening starting right from Dr. Reddy's acquisition of Betapharm and down to the ones we saw in 2008.
Maybe the Bharti deal is an exception. We do not know enough about the deal just yet for us to take that call but the fact of the matter is that when companies start to do this, you need to start getting even more cautious than you would be otherwise. What Bharti did when the whole industry was in the shambles back in late-1990s was perfect acquisition because those were struggling companies, about to go out of business, so the JT Mobile deal was good. Now I suspect you are paying reasonable market price, if not higher than market valuation, for your targets and that in a telecom business, somehow does not make sense but maybe Sunil Mittal knows something that we do not.


While we are on the subject of acquisitions, in light of what you just said, you think perhaps Reliance should not be trying so hard for LyondellBasell?
Mukesh Ambani is a very smart businessman, so if he is looking at doing something, I am sure he has again better information than what all of us do. We can only make that call after he has done a transaction rather than before doing a transaction.

My Comments:
My only comments here is I don't think we can see 12k this year.........but reserve my right to be wrong....afterall this is stock market.........SS is repeatedly giving 12k ......