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This painful phase may last well over 12-15 months: Dilip Bhat

Interview with Joint managing director, Prabhudas Lilladher

Mehul Shah  |  Mumbai 

Global will remain in the scary shadow as Europe struggles and the economy festers, says Dilip Bhat, joint managing director at Prabhudas Lilladher. In an interview with Mehul Shah, he says the 50-stock Nifty index could see market rallies, propelling it to touch the 5,500 level, but these may not be strong and sustainable. Edited excerpts:

Fears that Greece is on the brink of crashing out of the euro zone and of the debt contagion spreading to bigger European countries like Spain and Italy have rattled global in the past few sessions. How do you think the situation will pan out?
A generous quantitative easing through LTRO (long-term refinancing operation), earlier thought to be a panacea for all the euro zone problems, now appears to be short-lived. In the process, it has stirred a chain of overwhelming fears threatening to besiege the world As Europe undertakes damage-repairing measures, including de-leveraging, the world economy will necessarily get into a recessionary slow mode. Markets worldover will remain in the scary shadow as Europe struggles and the economy festers.

What is the worst-case scenario for Indian stock markets on account of the euro zone debt crisis? At which level of the Sensex / Nifty will valuations become compelling?
India’s problems now have been compounded by the euro zone issues. After a long, sticky inflation, the crisis is here to continue for a while and cannot be wished away. A gross domestic product growth of less than seven per cent per annum will lead to uninspiring and anaemic earnings growth for Indian companies. This, combined with a fiscal deficit of around five per cent, will make matters worse. The Nifty is doomed to spend time at best around 5,000. We may see rallies propelling it to touch around 5,500, but I fear these may not be strong and sustainable. It will remain a trading market for some time to come.

How do you think the weakness in the rupee will impact the market and India Inc in general?

The weakening rupee has already taken its toll. The markets have come down eight to nine per cent. At the current level of 4,800-4,900 for the Nifty, for an FII (foreign institutional investor) it’s like buying the index at 4,500 levels, which makes it attractive even if it is in the short run. For India Inc, it’s a mixed bag.

Like equities, both base metals and crude oil prices have slumped to four-month lows. Will that provide a cushion to stocks at some stage or will these asset classes behave in the same fashion amid global risk aversion?
Unfortunately, rupee depreciation has taken away the sheen from falling commodity prices, preventing any substantial benefits flowing to the local economy. Of course, as the rupee recovers gradually, it will provide a much needed boost to the stock markets and the economy. Looking at the state of the world economy, expect international commodity prices to remain south-bound in the near future.

Domestic concerns like policy inaction, widening fiscal and current account deficits, slowing growth and high inflation continue to hit investor sentiments. Considering all these factors, what is your outlook for the stock market in the next six to nine months?
We are in for a long haul. All these have put us in a vicious recessionary phase of low economic growth and weak earnings growth. My own sense is that stock markets will have to pass this painful phase, which may last well over the next 12-15 months. The markets can sporadically show rallies but the vulnerability to sharp down spikes remains a real threat.

What is your reading of the January-March quarter earnings season so far? How much earnings growth do you anticipate for the Nifty in FY13?
It’s once again a mixed bag. There are a lot of headwinds faced by the companies. Net profit growth is significantly below the top line growth. For FY13, we expect the Nifty earnings per share (EPS) to be Rs 401, a growth of 18.6 per cent year-on-year (y-o-y) and for FY14 the estimated Nifty EPS is Rs 451, a growth of 12.5 per cent y-o-y. Both FY13 and FY14 EPS estimates run the full risk of downgrades, if the slowdown in economic growth were to persist.

First Published: Fri, May 25 2012. 00:32 IST