Tuesday, April 19, 2011

Market may correct 15% from present levels: Sanjeev Prasad, Kotak Institutional Equities

In an interview with ET Now, Sanjeev Prasad , ED & Co Head, Kotak Institutional Equities , talks about the IT sector and market environment. Excerpts:

ET Now: Your first reaction to the Cairn deal? At 335, fundamentally speaking, is Cairn a good buy?

Sanjeev Prasad: It depends on what crude price assumptions you make. At current crude prices, obviously it will make a very attractively valued stock. Even if you take $95 a barrel crude price for the current fiscal year, EPS would come to somewhere about 57. So on a PE basis, the stock does look very attractive, but the whole thing is that two things you would have to keep in mind -- what is the long-term crude price assumption, which you factor in, and the second thing is what is the outcome of the royalty issue. If I take, say, long-term crude price assumptions at 95 in perpetuity, take from $115 a barrel crude price for the current year, say about $105 for next year. Even in that case, I would get somewhere about 370 as my valuation. If the royalty issue goes against Cairn, then you will have to save upwards of Rs 65 from there and suddenly you are looking at the stock, which is more like Rs 305. So at the current juncture, it may look okay, but you need some clarity on this royalty issue going forward.

ET Now: What about the overall IT market and in particular, the Q4 earnings?

Sanjeev Prasad: I guess Infosys had its own specific problems. Given the amount of management-related changes over there, there is a little bit of a case of people, generally focussed more on internal factors rather than on the external environment. So it could be just a specific case over here. Whatever other stories we are hearing from others is the demand environment continues to be very strong. There is some amount of pricing power in the industry. You are looking at above 2-3% realisation increases. Revenue growth could be anywhere north of 20% for the larger guys. So I would be too worried about the impact on others. Infosys is more of a specific case of two quarters of maybe underperformance till the time they sort out the internal issues as far as the management transition is concerned.

ET Now: Where do you see Infosys finally settling then?

Sanjeev Prasad: 2900 seems to be okay. If you look at our numbers, we are looking at about 145 now after reducing it from 155, which we had earlier. It does not look too bad. So it would probably settle down somewhere around 2800. It is probably a place where you can start looking at a stock again.

ET Now: What is the market factoring in? Are the concerns more local or global at this point in time with the kind of vicious selling that we have seen for the last two trading sessions?

Sanjeev Prasad: One, it was clearly a case of some disappointment with respect to Infosys numbers. It was one of the few sectors, IT, where people have some amount of earnings confidence because these are more linked to external environment and at least the demand environment for the IT sector seems to be reasonably robust. So, I guess it was some amount of disappointment, which came just because of Infosys numbers. On top of that, anyway you have a fair amount of concerns on the macro environment stemming from high crude prices and high inflation. So I am not very sure whether you see a case of outperformance for this market compared to other markets from where we are or even in absolute terms, big movement in the short term till the time you may see some clarity on crude prices coming down. The second thing is how does the government respond to high food prices and reforms after the state elections get over. If you take, say, about $115 per barrel average crude price for fiscal 2012 and do not assume any increases in LPG, kerosene and diesel for the entire year, then you are looking at a total subsidy loss of about 1,75000 crores, that's a mind-blowing number and somebody has to fund that.

At best the downstream companies can bear 10000 crores. Upstream companies, assuming the government asks them to bear one-third, which is the standard formula, then you are looking at the government still having to bear something like 1 lakh crore. That's a huge number in terms of the government borrowing programme and when compared to the 3.6 trillion budget in number, you are suddenly looking at 30% additional borrowing. Obviously that will have a significant impact on interest rates in the second half. Other option is you try and raise prices and of course given where inflation is, even without fuel price increases, you are looking at 9%, which was the last number which came out. If you raise prices even by a moderate amount, you are looking at very high inflation numbers through most of fiscal 2012. So it is a very big challenge for the government to manage the crude price challenge at the one side and inflation on the other. 

Source : ET

No comments:

Popular Posts