Suresh Mahadevan of UBS Securities is expecting the Budget to be a positive catalyst for the market. According to him, the government is going to announce a mixed Budget that is likely to be marginally positive.
In an interview to CNBC-TV18, he said that the Sensex may hit 22,500 by March 2012. "FY12 earnings growth is seen at 18 per cent," he added. Noting that data points on inflation is improving, Mahadevan feels that it is likely to come down.
However, he warned that foreign institutional investor (FII) flow is likely to be fickle in the short-term.
Mahadevan is positive on midcaps stocks like Tube Investments, Coromandel International and Exide. He also feels that L&T and BHEL are at reasonable PE multiples.
Below is a verbatim transcript of Suresh Mahadevan's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.
CNBC-TV18: A few weeks back you put out a note saying in this phase of turbulence, it is not inconceivable that the Nifty goes back to 4,500 or the Sensex goes down to 15,000 before it bottoms out. Do you still hold those targets?
Suresh Mahadevan: It is very hard to probably predict these things in the short-term. What we are essentially advising investors is if the markets goes down, a lot of investors would like to know how low can it trade and is it a good buying opportunity. Data point seems to be improving at the margin, particularly, on inflation. People are asking, is it a good time to buy and the answer is always, if you are a medium-term investor then you should buy the weakness in India.
At any point in time there are always ten reasons not to buy India. Even at 8,500 levels, a lot of people were worried. The market doesn't go up in a straight line. We are not out of this nervousness phase, yet, simply because a lot of money has come in last year, investors are still very nervous. Yes, the market can go lower and where we can completely blindly buy, it is at that 4,500 as well as 15,000 level.
However, my own sense is the index is almost misleading because if you look at some of the midcaps, they have corrected very significantly. You should generally be a buyer in weakness. That is a general theme we are trying to tell investors.
CNBC-TV18: Infrastructure has been absolutely demolished in the last month or so. You like names like Lanco which have got butchered the most. Any thoughts on what led to this carnage and whether it is justified?
Suresh Mahadevan: If you look at investors, in times of nervousness, the midcaps have no bias. That sometimes provides very interesting opportunities. I do think that not only is midcap infrastructure attractive but even largecap is probably quite good, whether it is L&T or BHEL. They have come to very reasonable P/E multiples. BHEL is now at 13-14 times one year forward. L&T is maybe at 16-17 times, of course on the midcap side, we like Lanco, we like Nagarjuna, we like GVK. My sense is if you have a 12 month view or something on some of these stocks they could be very attractive I feel for investors to pick on, particularly, on the infrastructure space.
CNBC-TV18: Would you then say that 15,000 is your bear case scenario for the market other than fair value because what people are trying to gauge right now is how much earnings have got hit by and where the market should settle at?
Suresh Mahadevan: Our target for the Sensex is still 22,500 by next March. Definitely, we are bullish in the medium-term. In the short-term, markets can go lower. The big worry I have is a lot of foreign investors have been nervous but looking at the FII numbers, it doesn't seem like they have all acted on their nervousness whether it is moving to defensive names or whether it is shifting money from India to other emerging markets etc.
If some data points or something else doesn't go well with the market and the market corrects, which triggers selling then 15,000 or 4,500 is a very good level where investors can just buy the market. In the meantime, investors can start accumulating select stocks which get weaker right now.
CNBC-TV18: A couple of months back, you turned positive on the telecom space. How have you read the newsflow with the TRAI recommendations and is it time to start switching out or would you keep the faith with telecom?
Suresh Mahadevan: There are a few things happening in telecom. With respect to the TRAI recommendations, there is still a lot of debate around whether 3G prices can be applied for 2G etc but the reality is given the publicity that the spectrum allocation and the scam has got, any spectrum that is going to be given to operators is going to be at market linked prices and that is something which is inevitable. I don't think that is a bad thing because that is how things happen everywhere else in the world.
If you look at the sector, you look at the three players. With the exception of Bharti, nobody earned the cost of capital. Some of these companies have been in the business from 1995 onwards. It has been 16 years and they still don't earn the cost of capital. That situation is not sustainable. Something has to give here where either the industry consolidates or prices go up, I don't know. If regulation as prescribed by NTP 2011, which might come out in April becomes better for consolidation, then pricing power may emerge and the sector would be better.
It is a great time to buy into something like an Idea or Bharti at this stage because these are high quality companies which are going to be in the business and investors are getting it at a very attractive pricing.
CNBC-TV18: How are investors approaching Reliance Communications or Reliance Infrastructure now because they have some institutional holding? What is the general feedback you are getting in the midst of this newsflow?
Suresh Mahadevan: A lot of fresh investors are not looking at them because the newsflow makes them quite nervous. Existing holders are still holding on, they maybe looking to add even at lower levels. However, given there is so much newsflow around these two companies, investors are definitely nervous on these names.
We had put out a note for contrarian investors where people buy when other people avoid such stocks. Both these stocks are in our contrarian basket and I do think for investors with higher risk appetite, both these stocks present very attractive entry points right now. This is the height of negativism and if things get a little bit better, you could get quite a bit of return on these names.
CNBC-TV18: On the technical risk to this market, from the FII outflow front, is there anything fundamental that you see in the next three-six months which can peg this market lower in terms of earnings, macro or governance newsflow? What would you highlight as key risks?
Suresh Mahadevan: Clearly, the higher inflation expectation is obviously priced in and if the Reserve Bank of India (RBI) comes and tells you their expectation is now 7 per cent by March end that is priced in. Earnings growth, which was well above 20 per cent, is slowly starting to come down. We are now at 18 per cent growth for FY12, maybe the realistic number is 15 per cent. The market, more or less has partly priced this in.
Clearly, crude oil could be a big variable going forward because the market in India tends to have a somewhat a negative correlation, not always, but currently, given the focus on deficit, inflation etc. I do think that the Budget could be an interesting catalyst because after speaking to investors, the expectations are not very high. The government is probably smart enough to have a little bit for everybody.
The Budget may end up as a positive catalyst in my view because there is a roadmap we have containing fiscal deficit etc. The Budget may try to address some of these issues which could be a positive catalyst. My sense is inflation will come down but till 5 per cent levels are very unlikely. Crude and probably government policy could be the big things.
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