Suresh Mahadevan, HoR, UBS Securities sees Sensex target of 13500. He expects a 5% growth in earnings in FY09 and a flat growth in FY10. According to him, economic growth is likely to revive by second half of 2009. He feels that markets are trading close to trough valuations and a rally is likely before elections.
According to him, ICICI Bank is trading at close to 'distress' valuations and is a good buy right now. He is negative on HDFC Bank due to valuations. SBI loan book growth is aggressive and could result in negative fundamentals, he added.
He believes that auto stocks are pricing in bad news already and more downside is seen there. He is negative-to-neutral on commodities, refining margins. He is also negative on oil marketing companies, negative-to-neutral on steel companies.
He is selectively bullish on infrastructure space in the long-term, but currently not confident. He feels that infrastructure companies' order books may show negative momentum over next two-three months.
Here is a verbatim transcript of the exclusive interview with Suresh Mahadevan on CNBC-TV18. Also watch the accompanying video.
Q: First a word on your Sensex target of 13,500- how you derived it and how you feeling about the market right now?
A: As we said in the report we are quite bullish in the medium-term and Sensex currently is trading at almost 10 times earnings and price to book is 2.5 times which is clearly close to trough valuations we have seen historically. We believe that the economical growth will start reviving in the second half of the next fiscal year.
The way we are deriving the Sensex target is very simple; we assume a 5% growth in EPS in FY09 and flat EPS growth in FY10 and then we put a trailing multiple of 15 times. The reason why it is 15 is because 15 is where the market is somewhere in between trough and a recovery. So at the trough market trades at around 9 times at the low and in a recovery typically it trades anywhere from 20-21 times trailing earnings. So, we have taken an average and put it at 15.
By March 2010, I would at least assume we have a partial recovery in the markets. So that is where we get our Sensex target of 13,500.
Q: With regards to your list of the least preferred and the most preferred stocks- It is interesting that in your most preferred list you have Punjab National Bank and ICICI Bank and in your least preferred list you have got State Bank of India and HDFC Bank – is it just a relative valuation call?
A: Our bank analyst can give you more details but to give you the big picture; ICICI Bank we think is trading close to distress kind of valuation on an adjusted price to book its at less then half times and clearly there has been lot of negative news on this name but on our measure of intrinsic value, we think this is a very good buy.
On Punjab National Bank, the bank has been lot more conservative than others; they have been limiting loan growth so we like that kind of a structure right now.
With HDFC Bank, I think it’s purely a relative valuation call, we definitely expect NPL’s (non-performing loans) to pick up and we think well owned stocks like HDFC Bank if there is some disappointment, I think there could be some sell off, so it’s a valuation call.
With SBI, the bank has been fairly aggressive in terms of growing its loan book and we think given the times that could result in negative fundamentals. So, at least at the margins fundamentals could deteriorate. That is broadly the logic of our banks recommendations.
Q: What are your thoughts on autos where you have seen some ugly monthly numbers, your least preferred list also has Tata Motors but you believe that valuation still do not price in negatives which everybody is worrying about?
A: If you look at our auto numbers we are considerably below street but having said that the October numbers we saw in autos which are 28% year on year decline of something, I think that is still a very slowdown in points too. I think to a large extent stocks maybe pricing in bad news already but there is still probably a last leg when actually the news desk confirmed that.
We are negative on Tata Motors partly because of slowdown, partly because they are heavily leveraged as well.
In the auto space we quite like Hero Honda. That company has really stood out. In times like this there are certain companies which clearly stand out and Hero Honda is one of them, which is a stock we like even in a sector like autos which is quite exposed to slowdown.
Q: Commodity plays are neither in your most preferred list or least preferred but specific to oil and energy how are you feeling about some of those stocks because they will have a meaningful impact on the Sensex earnings that you are talking about?
A: We are kind of neutral to negative on commodities generally. If you look at metals, our view is neutral to negative and if you look at refining margins etc we are negative both regionally as well as globally. The reason why some of those names haven’t made it to this list is because we cover close to 100 stocks and we don’t want to give a very long list of names. So where the analyst is conviction is pretty high in these names whether it is on the most preferred side or least preferred side.
We are generally negative on oil marketing companies and we are generally negative to neutral on steel companies as well at this point.
Q: In your report you indicate that in the near-term you are expecting to see rally pre elections - do you think there might be strength to play for before the general elections?
A: I think before most of the elections there is kind of anticipatory rally and this also fits in with the market probably trading close to historical trough valuations. So with the combination of this, we could expect something in the short-term but having said that for sentiment and liquidity to reverse, particularly for the Indian market, we need some clear positive triggers and for India those are going to be led by probably an economic revival, probably political certainty post the elections.
Sometimes the markets look one quarter ahead in tough times and maybe before the elections there could be a rally because market might be thinking there could be somewhat more certainty post elections and so in that context we have mentioned that.
