Bihar outcome to have a plus/minus 2-4% impact on market: Mukherjea

Saurabh Mukherjea, CEO of Institutional Equities at Ambit Capital, says the dismal September quarter numbers could lead to a 400-500 basis points fall in Sensex EPS growth estimates for FY16. In an interview with ET Now, he says on a scale of quantum of surprise, L&T numbers were really a stunner for the Street. Excerpts:-


ET Now: Let us talk about the broad theme at the conference, earnings season. Do you think the EPS cuts have been more than anticipated?

Saurabh Mukherjea: This has been a consistent pattern for the last three or four years. The consensus begins with some overoptimistic expectations, and then as the year wears on, the numbers get cut. I do not think this year will be any different.

My reading is the consensus Sensex EPS growth estimates are still around 13-14 per cent and they will gradually converge over the course of this earnings season and the next one to our number, which is around 8-9 per cent. So I think 400-500 basis points fall in Sensex EPS growth estimates for FY16 certainly seems to be on the cards.

ET Now: According to you, what could be the top positive and negative surprises so far from the earnings?

Saurabh Mukherjea: This year’s scale of L&T’s disappointment was a surprise even for us. We have had a sell on L&T for a long time. The sheer scale of the disappointment took us back. It clearly suggests that the core of the capex economy and the core the industrial economy in our country is really in poor shape.

On the positive side, the fact that Infosys at least delivered on this quarter was good to see, that would make it a good couple of quarters. This is the one time the IT bellwether has delivered decent results. Similarly, Cummins finally turning around and posting decent numbers for two quarters in a row is also heartening to see. But on a scale of quantum of surprise, L&T was really a stunner.

ET Now: Do you think the current earnings warrant a change in your stance and your target for the index? Are you likely to revisit it?

Saurabh Mukherjea: We have been bearish for a good six to seven months now. That will be a fairly pronounced bearish stance on our part. Out Sensex fair value at the end of FY16 stands at around 28,000; we are fairly comfortable with that view. That is the fair value view, but as I have said several times, my reckoning is that there is a distinct possibility of Sensex@22,000 scenario, a fairly materially downside scenario, as the economy continues slowing down, the real estate sector crumbles and the banking system feels the knock-on effects of that.

ET Now: So what would be your preferred sectoral largecap as well as midcap bets right now?

Saurabh Mukherjea: We are focusing on is manufacturing companies, light industrial manufacturing companies, ideally with the ability to export and find their way out of trouble. So from that angle, PI Industries has been a stock we have been highlighting for a good couple of years now. My reckoning is, given both results and discussions with the management, PI seems to continue to have good visibility on earnings; that’s from the midcap side.

On the largecap side, I would look to HCL Tech. It has come off substantially -- around 20 per cent -- in last one month. Given the track record of this company over the last four to five years, given the strength and remote infrastructure management, engineering services, HCL Tech at 15 times earnings looks very attractive to me.

ET Now: The key talking point is Bihar elections and the outcome. Do you think it will have a material impact, and if so, how much in either case?

Saurabh Mukherjea: Part of the discounting or impact has already begun, as reports on various media channels have started drifting in that the BJP might not be doing as well as it was perhaps thought to be doing at one point. You would already see the market softening a bit.

My reckoning is that next Sunday, November 8, will have an impact on the market somewhere around plus or minus 2 per cent to 4 per cent. Again hard to gauge it, given that I am not really a political expert, so it’s hard for me to gauge which way this election will go. But whichever way they go, a plus/minus 2per cent-4 per cent impact would appear likely, given the size of the state and given the impact that the state can have on the Rajya Sabha composition with a time lag.