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Our base case target for Nifty is 9,000 by Dec-end: Gautam Chhaochharia, UBS

While consumer sentiment has improved over last year, outlook on salary growth has not.

, ET Bureau|
Updated: Oct 03, 2017, 09.06 AM IST
 We are underweight capex cycle names and industrials. We don't see any signs of any capex recovery happening in a hurry.
We are underweight capex cycle names and industrials. We don't see any signs of any capex recovery happening in a hurry.
Gautam Chhaochharia, head of India research at UBS foresees further cuts to consensus earnings estimates for the current financial year even as Nifty earnings forecasts for the year have already come down by 10%. In an interview with Sanam Mirchandani, Chhaochharia said he sees Nifty at 9000 by the end of the year, which would mean a further 8% fall in the index from current levels.

Edited excerpts:

FPIs have been pulling money out of the Indian market for the last two months. Do you expect further correction in the market?

Our base case target for Nifty is 9,000 by the end of December 2017.The upside scenario is 10,000, which is where the index has been for a while. We are not changing it. The upside scenario is based on very optimistic assumptions that we will see a strong growth recovery immediately in FY18, multiples will sustain and even re-rate further. Our base case is also not very pessimistic. The base case also assumes some mild earnings recovery. However, that is also looking tougher given how the first quarter (April-June) has panned out and the signals we are getting about Q2 (July-September). Our recent survey of 1,500 urban consumers suggests that while consumer sentiment has improved over last year, the outlook on salary growth or job outlook per se has not. So a recovery in the second half looks quite difficult.

Will FPI outflows continue at the same pace?

Other emerging markets have seen earnings estimates revised up this year. India has seen 10% cuts to Nifty estimates for the FY18. Absolute growth levels are not very impressive and are in single digits. The hope for earnings growth, which is what kept investors engaged in India for the last three-four years, has not shown up in numbers yet. It should show up over the longer term. It does not mean that they have pulled out in any big way as such; it is a small tweak of their positioning. They still remain overweight India but the level of overweight has come down. They still remain hopeful and positive on India from a long term perspective but they are recognising the near term risk-reward in other markets where valuations are nowhere near as expensive as India.

Do you see more cuts to consensus earnings estimates for FY18?

We should still see some more cuts for FY18 and fiscal year FY19. It de pends on what kind of shape economy takes post the GST disruption.We are looking at 10-12% earnings growth for FY18 and 12-14% for FY19. We are building in a mild recovery which at this stage.

Do you think there will be a risk from the unwinding of balance sheet by the US Federal Reserve?

It should not be a risk because if the pace of withdrawal of easing or withdrawal of surpluses is going to happen gradually. Secondly, it is happening in the backdrop of a reasonably strong economic environment.

Domestic liquidity has been supporting the market. Do you think it is here to stay?

We don't believe that local flows are necessarily structural. From our very long term perspective, Indians are under invested in equities and exposure to equities should keep going up.However, the percentage of household savings which are going into equities is lower than what we saw in 2007. Secondly, if we look at the argument about flows being strong because people are moving away from property etc, those arguments have been there for three years but the absolute allocation towards equity is still peanuts compared to the amount of household savings every year. In January-February of 2016 when one year returns became zero or negative, they withdrew despite elements of low inflation, low interest rates, gold and property not doing well.They withdrew because markets corrected sharply. Local flows depend on how markets do. Flows follow returns, not the other way round. Investors are putting more money now simply because they have and are making money. That risk has to be kept in mind.

What are the investment themes that you are currently looking at in the market?

We are underweight capex cycle names and industrials. We don't see any signs of any capex recovery happening in a hurry. We are overweight on two-wheelers. Our survey suggests that two-wheelers are also seeing a pickup in urban India. We are overweight on auto parts makers. On IT, we have a tactical overweight because valuations are reasonable, worst case of the digital tailwind globally seems to be priced in, earnings estimates are low, there is a possibility of cyclical upside from US spending picking up. Rupee is a short-term factor which should help them. Our view is that rupee will have a depreciating bias against the dollar over the longer term but it will likely outperform other emerging market currencies. We like telecom infrastructure space. Consumer staples is an overweight and in consumer discretionary, we are selectively overweight.

Pharma index has recovered from the lows. Do you think the sentiment there also is turning?

We are neutral on the pharmaceutical sector. The neutral stance reflects that valuations are much more reasonable now but also reflects that the visibility of the business is no longer as strong as used to be.You have to be much more stock selective and focus on companies are going to drive new approaches like specific complex molecules or having more presence in emerging markets and India.

What is your outlook on the banking space?

We are neutral on PSU banks. There will be trading opportunities here and there, but long-term business case is still not clear. On private sector banks which are exposed to the corporate side, again our view is mixed. The risk reward profile is very different for different banks.We continue to like retail focused private banks and non-bank financials specifically linked to housing.
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