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Manishi Raychaudhuri, ED at UBS Securities, has a view that the month of April and May are going to be crucial for markets. He adds that the next 4-6 weeks are a good time to re-look at earnings growth forecast though the Sensex target remains unchanged. Speaking to CNBC-TV18, he says that the risk appetite has come down a lot and market today is at 15x 1-year forward PE.

Excerpts from the exclusive interview with Manishi Raychaudhuri:

Q: Bad fall yesterday, rocky trade today, what do you think is going on, what kind of a band do you see the market in April?

A: As usual, it’s difficult to take a short term call, but I would think over the next couple of months, that’s during the quarterly results season, the market would remain volatile and possibly in the current range, that it has marked out for itself which is somewhere around 15,000 to 17,000.

Apart from the global uncertainties, there are quite a few other things which are bothering the markets right now, for instance, declining IIP growth, increasing inflation and also the fiscal and monetary measures that would be taken to counter inflation and finally the regulation regarding the mark to market losses on derivative securities which has been passed by the ICAI yesterday that’s a step in the very right direction. But in the short term, the market may take it negatively because there are certain companies which may report significantly negative numbers as a consequence of that.

So all these things put together means some degree of continued uncertainty over the next couple of months at least.

Q: Does one have to fear a lot from earnings this time around as we approach it, people are talking about negative surprises, a few individual stocks are selling off on fears, do you think this earnings season will come out more on the green side or on the red side?

A: In the January-March quarter, India Inc reported something in the range of 15%-18%, that should be a reasonable number because currently for the full year, we have an earnings growth of about 21%-22% factored in, and about 15%-18% for the fourth quarter should be enough to meet our target. Of course I don’t really know whether the market is expecting that kind of a number or whether the market’s expectation is higher, but there could be a few sectors where there could be some earnings risk not necessarily in this quarter but going forward, maybe in FY09.

For instance I could tell you that we are currently expecting about 18.4% earnings growth for the Sensex companies, and even for our covered universe it’s not too different. There are certain sectors like the banks, or the smaller construction companies which could face some difficulties in FY09, because of different reasons. Banks could face top line compression because retail lending growth refuses to pick up, construction companies may face raw material cost pressure and for some real estate companies there could be some execution delays which could eat into their earnings growth. So these are the issues that we are grappling with and I am sure most of the market participants are grappling with it as well.

Q: What was going on with BHEL today, the stock lost 9% just like that, any concerns that one should have about earnings expectations this quarter?

A: I am honestly surprised by the today’s move; daily movements can never be fundamentally explained. As far as the earnings are concerned, the major worry about BHEL is whether it would be able to pass on raw material costs particularly steel and other metals, and secondly whether the employee or the staff cost increases would eat into its profit margins because ultimately for BHEL, that’s a very sizable number, about 14%-15% of net sales.

So we personally think that when the order back logs for a company are so high, then it can afford to ignore the relatively low margin orders and go for the high margin orders.It should also be in a position to pass on part of the cost increases, so we are not really overly worried about a very severe margin compression though I understand that we have already taken some margin compression into account. So these are the things that are worrying the market and since the environment itself is not very positive, any small piece of negative news or any small piece of concern tends to impact stock prices in a big way and that’s exactly what we saw in the capital goods sector today.

Q: Where do you stand on this metal lot? There are lots of fears in the market that now the government will not let steel companies raise prices. We have seen them lose quite a bit of ground over the last two-days. Are those legitimate fears?

A: It is difficult to take a call. But if you go by the experience of the cement companies, over the last one-year, they hardly increased prices. I don't think the markets concern is completely unjustified. Ultimately, I don't think these artificial caps on prices or indirect caps on prices work, as we have seen in the case of cement.

If there is demand on the ground and if manufacturers don't increase prices at some stage in the supply chain, may be at the retailer's level, prices do increase.

So, the route to cutting inflation would possibly be to give supply-side initiatives or it would automatically happen when new supply comes on ground in terms of corporate capex and expansion of capacity in different industries. In the interim, the sector has reacted as expected.

Q: Do you have Axis Bank under coverage? Have valuations of private sector banks come off?

A: No, we don't yet cover Axis Bank. Valuations of private sector banks have come down quite a lot. In some cases they have almost halved from their peaks, but even after this they don't really compare favorably with pubic sector banks. In terms of valuation, one cannot really compare private sector banks with PSU banks.

However, private sector banks score in terms of their sustainable ROEs. Some private sector banks also have certain embedded values. In other words, they have certain assets or businesses, which are not adding to earnings today. Therefore, inflating their price to book valuations and price to earnings valuations.

But at some stage, those assets or businesses would become profitable. The valuation that we see today may not be really reflective of what we may see going forward.

Q: From a strategy perspective, we have had enough reason to go back and re-look at year-end targets because some things have changed over the last few weeks, not just global but inflation and much lower growth etc. Do you think it is time to go back to the books and re-look at expectations for the year or you would wait for a couple of more quarters of earnings before doing it?

A: This April-May season is going to be crucial. As far as the earnings or the critical variables which are influencing earnings are concerned, we would get some sense from this April-May period. In certain sectors, particularly IT, they would also given full-year guidance which acts as some kind of a bellwether for the entire year. To that extent, this April-May period, or over the next 4-6 weeks, would be a good period to re-look our own earnings growth forecast.

No, we have not yet revised our full-year target for the Sensex, which remains at 22,000. It may look quite inflated because not only have earnings expectations suffered a little, risk appetite has come down quite a lot. That has had a bigger impact on stock prices as whole. If I go back to January, the market was trading at something around 21.5 times one-year forward PE. Today, it is at about 15 times, so it is really valuations or risk appetite that has take a toll on this market, a lot more than earnings expectations have had.

I must also mention that this 15 times PE is in the backdrop of an 18-20% earnings growth which we think is sustainable, may for 1-2 quarters. It may not be satisfied but over the long-term that 18-20% seems attainable. In that context, this 15 times PE is not really unreasonable, in fact its quite reasonable. There are certain sectors or stocks which are trading at quite attractive multiples. Such stocks are quite easy to find even among the largecap space. One doesn't really have to go down the value chain and look for cheap smallcap names in this market. If an investor has a reasonably long-term horizon, this is not a bad market to enter.

Source: Moneycontrol.com