‘A deluge of QIPs and GDRs could impact liquidity’

The best way to be successful in the equity markets is by picking stocks rather than by chasing momentum, says
Sanjay Dongre, senior fund manager at UTI Mutual Fund. A student of engineering and an alumnus of IIM Calcutta, Dongre has worked across the wide spectrum of the securities market. He started as a debt analyst, moved on to equity research and also acted as a dealer, handling activities related to the secondary equity market operations.
Dongre spoke to DNA on development and earnings growth and the impact of the delayed monsoon on the market. Excerpts from the interview:

What is your outlook on earnings?
In the near term, quarterly corporate earnings will be the important driver for the market. Given the fact that most of the quarterly results have been ahead of street estimates, the sentiment is likely to be positive. The quarter ended June 2009 is likely to be the trough of the economic cycle and corporate earnings are likely to recover from the quarter ending September 2009. Leading indicators have been showing improvement. The GDP growth of 5.8% in the last quarter was a positive surprise. Industrial production has also turned positive, growing at 1.4% year on year (y-o-y).
The earnings in this quarter have been boosted by cost restructuring carried out by various companies. To add to this, material costs also came down and as a result, we have seen that earnings expectations have been beaten and markets have been positively surprised.

Consensus forecast for the earnings growth remains pessimistic and it is likely to be revised upwards as analysts start pricing the recovery in the global as well domestic economy. Also, with the recovery in the second half of this fiscal, the market will start focusing on the earnings of FY11 and valuations should start looking reasonable.

So do you see a secular upwards move for the market?
We will see periods where the markets are oversold and others where there are bouts of profit-booking after a lot of buying. Earnings, valuations and liquidity support the view of markets going up and sustaining its rally in the near term. The risk appetite of foreign institutional investors (FIIs) is going up on the back of recovery in the US economy. There are green shoots in higher housing sales and fewer people filing first-time claim for jobless aid. There is a lot of potential for the market to go up by 10-12% in the next 2-3 months, taking Nifty past the 5000 level. This will be driven primarily by rising flows to emerging markets like India.

What are the concerns you have for the market?
If the Nifty crosses the 5000 mark in the near term, the valuations at 17-18 times one year forward earnings would start looking stretched. The key concerns outside of valuations would be the supply of paper from Indian corporates. A deluge of qualified institutional placements (QIPs) and global depository receipts (GDRs) could have an impact in terms of availability of liquidity.

Monsoon is and will remain a key concern for the markets. But it is too early to take a call on it. If the discussion regarding the monsoon was a few days ago, things would have been more upbeat. So it might not make sense to pass judgment on how the rains will be affecting the economy before the rains are over and done with it. If rains come later in August, they will boost groundwater levels and have a positive impact on the rabi crop.

The other concern is regarding whether the global economy will recover. If the global recovery doesn’t take place as expected then growth in economies like India would also be affected.

What is your outlook on the cement sector?
The numbers for this sector have been excellent in the current quarter. There are some concerns on oversupply, which limits the visibility over a period of 6-9 months. If demand goes up substantially and the economy expands at a faster pace than expected, then oversupply will cease to be a concern. Logistics can also play a role in the pace at which the new capacity is added. It is possible that capacity addition could be held up. Things will only become clear in 6-9 months.

There is a perception that a lot of the money that has come into the Indian markets is short-term in nature. Is that a risk to the liquidity in the markets?
The fact that a hedge fund invests money in a market does not necessarily mean that the money is there only for a short period. There are times when there is a greater churn when it comes to these funds, but there are occasions when the money sticks for six months or a year. At the other end of the spectrum, many long-only funds would flip their investments if they think that circumstances have changed or that a substantial profit is made sooner than expected.

Every investor can have a short-term view, what it depends on is the external conditions. As long as there is risk appetite, liquidity in the Indian markets will continue, irrespective of who has already put money into the markets. The risk to liquidity is likely to come from overall monetary tightening rather than ‘hot’ money evaporating.