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Old 10-22-2009, 07:50 AM
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Default See mkt at 19K by Dec-end, bullish on ITC, HUL: Kotak Inst

Sandeep Bhatia, Executive Director and Head of Sales, Kotak Institutional Equities, says the Sen*** may breach 19,000 by year-end. "Foreign fund flows are likely to drive market and are a positive for India." However, he was quick to add that 2010 is likely to be difficult for markets as interest rates are likely to rise from February-March onwards.

Bhatia remains positive on Jaiprakash Associates despite its Q2 numbers coming in below street expectations.

He is also bullish on ITC and Hindustan Unilever.
Here is a verbatim transcript of the exclusive interview with Sandeep Bhatia on CNBC-TV18. Also see the accompanying video.
Q: Are you feeling a little apprehensive about what the market might do after this earnings season or do you think by the end of this year the market may actually scale even higher levels?

A: I have been saying that the result season will be important because we will get a clear data point on the underlying corporate earnings. I think the numbers are panning as per expectations. I would have been happier if there had been bigger surprises. We still are in the first one-third of the earnings season and have at least 60% to go. Right now, we are not seeing any major surprises.

Given the fact that earnings are as per expectations, with no major surprises, I think itís going to be flows that are going to drive this market. Flows remain positive for India. As long as US interest rates donít start rising, the market will continue to motor on. So, I wouldnít be surprised if we see the market reaching 19,000 by the end of this year.

Q: Whatís your house view on JP Associates given the results they came out with last evening?

A: Our view on the stock has been positive but these results have slightly disappointed. We have to look at what is driving the growth of this business. I think Q4 is generally a quarter in which JP Associates does well. The concern if any should be on the cement business, because the business has seen margins compress. Itís been due to higher depreciation cost. We will have to see how it pans out in the next few quarters because cement prices have tended to be weak recently. On the whole, they are big drivers in the business both on the power and real estate side and thatís something which will come through primarily in 2011.

Q: What about the Q2 numbers of Hero Honda and Bajaj Auto? What did you like?
A: I have not had an opportunity to look at Bajaj Autoís numbers in detail but Hero Hondaís numbers have been higher than expectations primarily on the margin side. This quarter, which is October to December, will again see some expansion of margins, but itís probably running at a point in time where margins are nearing the peak for Hero Honda. So, its now going to be primarily driven by volume growth. That comes down again to the key macro factors which we have been highlighting which is interest rates.

Our expectations are that interest rates will start rising from February-March onwards as inflation will be reaching new peak, so thatís the key driver on the macro side for this market. We see good flows going into end of this year and then we have to closely watch whether the macro worsens with higher inflation and higher interest rates. As far as Hero Honda is concerned, I think the numbers will continue to surprise. We are looking at earnings of Rs 100 for this year. I think there could be even a small upside to that for the current year.
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Old 10-22-2009, 07:51 AM
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Q: Things have flattened out a bit globally. Is it your sense we may have hit that phase for the market where things consolidate for a little while and move in a tight range?

A: On valuation parameters this market has been fully priced. This is something which I have repeatedly highlighted. Itís a combination of going to see new macro factors, which will come in the first quarter of next year for India. As far as the global outlook is concerned, we are out of the woods. We were in deep trouble and we started coming out from May-June onwards.

The big question is whether we can continue to progress up. That depends on how the interest rate cycle moves in the US and whether growth holds up. Itís impossible to say what will happen, but I will be very cautious in 2010. Itís extremely unlikely that we will see the market return the kind of returns it did in 2009. So, this is going to be very important year because 2009 had a fantastic low base effect of 2008. 2010 essentially is going to be the year in which the entire macroeconomic stimulus which the developed world has put into play will be tested. If we see that the economies are not holding up when the interest rates start rising, when the exit strategy of various governments comes into play, then we are in a big trouble because we cannot just continue to inflate away out of this mess. So, thatís going to be extremely important for 2010. We probably had a good 2009 last quarter and 2010 is going to be most treacherous and tricky than 2009 has been.

Q: When you say a good last quarter, are you expecting another blow out like we saw in 2007 with a liquidity gush into December or do you think not as big a blow out as that?

A: I indicated that it maybe around 19,000, thatís the best the index can go to. Yes, itís a good quarter but I am not going to say that thatís going to be a big blow out quarter as such. Itís impossible for any fundamental analyst to tell that in fact. So, itís expecting too much for someone to be able to predict that with any accuracy.
Q: How are you feeling about the entire IT space? Would this be one of your not preferred sectors in terms of valuations or do you still like it?

A: We actually though that this would be a good interesting play especially with the recovery that we have seen in the banking financial services space in the US. In the next six months, we will see ordering happen. The rate pressure has subsided significantly. The IT space would continue to post good results. The guidance from Infosys was more conservative than we would have liked. I think the upward pressure on the rupee is definitely telling on the kind of guidance that companies want to put out into the market.

On the whole, itís a good US reflation play in the IT sector. It would be good to have a neutral to slightly overweight position, but not a whole lot because a big factor which will impact IT would be the currency movements and there is going to be a whole lot of pressure next year on the dollar. I wouldnít be surprised if the rupee has a good run in 2010. If the rupee continues to appreciate, it is good news for for India. Inflationary pressure will get muted a bit, but the IT sector can get hit. In the near-term, IT remains a market performer. With a 6-12 months horizon, itís clearly dependent upon how the rupee moves. If the dollar comes under renewed pressure in 2010, the IT sector would probably not be a huge out performer.

Q: The pivot sector seems to be banking. Whenever banks move, the Nifty seems to get some kind of thrust upwards. Banks seem a bit tired over the last couple of sessions. How are you calling the financial space from where they have reached after their recent performance?

A: I think the banking space has not surprised on numbers. I think the second half would see higher volume growth coming through and that could be a driver to good numbers. Right now, the banking space did not surprise on numbers which is why it is looking a bit tired. But itís actually the only sector which offers potential of earnings surprise going into the next six months. This has not been factored in valuations. So, there is some valuation comfort there especially with large public sector banks. It is also one of the sectors where you will not have rampant equity issuances. To that extent, the shareholder returns will not get significantly diluted. Thatís definitely something which continues to be the fulcrum of a good portfolio.
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Old 10-22-2009, 07:51 AM
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Q: You old favourite Hindustan Unilever and ITC and how are you approaching them?

A: The consumer sector should have a good run especially if 2010 is muted. On the assumption that 2010 is not 2009 all over again, 2010 would probably be a year where valuations matter and stable earnings growth will deliver good performance. To that extent, both these companies will do well. I expect good volume growth to come through in ITC. As far as HUL is concerned, the market has been worried about the recent market share losses.

The fact that inflation is mostly good for consumer stocks as they have pricing power and the ability to pass that on. As long as that happens, that sector could do well. The only thing is that valuations are in the 20s, so it would have been better if they were lower. But itís actually something which could look interesting in 2010.

Q: Itís a 6% fall for JP Associates early in the morning. Do you think the earnings disappointment has been adequately prices in or are you expecting some lingering underperformance?

A: I wouldnít think there would be some lingering underperformance. I think Q4 is going to be good, so somewhere in November-December people will start factoring a strong Q4. I think the real issues for most stocks right now are whether they can deliver 2011 earnings numbers and JP Associates is one of the strongest earnings growth candidates for 2011. But we have to remember that the context of the market will change, which I have highlighted in my previous discussion.

Q: Has Sesa Goa stock being punished enough for below unexpected earnings or do you expect the stock to under perform?

A: It is not only Sesa Goa but the entire metal space. It is an in interesting inflection point essentially on the back of a dollar slide. There has been a rise in crude oil prices. If that continues, then commodities markets could have a stronger 2010 first half. But the reality is that commodities need to be consumed; itís not just price speculation which should drive their prices.

In the near-term, the worst is behind for stocks like Sesa Goa. We could see a dollar slide help metal stocks and basic material stocks. In 2010, the real question is whether the economic growth is there for the worldís largest economies. If that doesnít turn-up, then most of these stocks will not be able to seen sustaining a high that they would probably get in the first half of 2010. Right now, we are fine but the bigger question needs to be answered in Q1 next year.

Q: Do you have a call on Tata Motors among the autos?

A: The key concerns for the markets should be what is happening on the Jaguar-Land Rover (JLR) issue. I think the domestic business is doing fantastically well and I donít think there are any concerns there as far as both volume growth and delivery is concerned. I think we have seen very good development by the funding which has happened. I think Tata Motors may require one more round of funding and the biggest question there is how the volumes recover in the JLR business. That to me is going to determine how the stock does in 2010. So, the balance sheet stress to a significant extent has got eased. If that continues to get ease, then the focus will be on the international operations because domestic operations are very much on track.
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