WF: The current sell off seems to have started on the back of external news flow. From a domestic standpoint, are there any concerns on the horizon? How do you see the earnings shaping up? Are there any concerns here caused by some high profile names missing street expectations? There are also fears about rate hikes and tightening, fears about fiscal stimuli being withdrawn etc. What is your view on these issues?

Harshad: Let me touch upon the earning season first.

Earnings season : midcaps to the fore

I looked at the aggregate data at the end of last week and earning season that time was little more than half way through and as you rightly mentioned it's a mixed bag. On balance, on an aggregate basis, corporates have surprised on the positive, compared to the expectation. If you look at the companies that managed to beat estimates Vs companies that lagged estimates, the ratio is 2: 1. So overwhelmingly companies have done better than expectation. Obviously there have been some high profile disappointments, but I don't think this distorts the big picture.

Now lets also touch upon the whole issue of Large caps Vs Mid Caps. If you look at a wider universe of companies and we are on using the universe of one of the domestic brokerage house with probably the widest coverage on the street. If you look at that, mid caps generally have done better than their large cap peers. At the EBIDTA level and at the net profit level, they have grown faster by about 10 % points. That's I think quiet material. So I don't think that result season is bad at all. Infact if you look at the results very carefully, if you also look at the commentary of the management from the conference call, there definitely seems to be an improvement, genuine improvement in demand.

If you go back to the first two quarters of this fiscal, the whole story was not so much of the demand improvement but, margin improvement because of cost cutting that was done earlier. Now I think the story that is unfolding slowly which is not completely unexpected is that the demand is growing and so will volumes. Obviously there is over capacity in certain industries, because in anticipation of continuing demand, lot of capacity got added in various sectors. But I can cite at least two examples where managements after announcing the results confirmed that they are going to add to the capacity. One high profile example is Maruti. It was not that it was completely unexpected - but the timing was a surprise. They announced at the time of result that they are going to increase capacity by half a million units in the next 2 years. That's encouraging - that tells you that the confidence in the recovery of the domestic economy is definitely there. Similarly Asian Paints which is in the midst of expanding its capacity - they are commissioning their plant by April - and have yet announced that they will be putting up one more plant. I think these are very encouraging signs. Because when good managements announce capacity increases, they can clearly see the demand coming.

We have been quiet positive on the Indian market from the medium term perspective. India is a story of accelerating economic growth and accelerating earnings growth. It is quite likely that we can see a repeat of what we saw between 2003 and 2007 in terms of earnings growth and the string of positive earnings surprises that corporates were able to deliver. The fundamentals are therefore on a sound wicket.

New equity issuances will be a drag on the market

One domestic aspect which is a worry is on the fund flow side. The supply of fresh equity is going to be very important factor for 2010. In 2009, roughly US$ 20 Bn were raised through fresh equity issuances - overseas and domestically by Indian corporates. In 2010, the Government will emerge as the biggest seller of equity and there are any other private sector issuances lined up. If large amounts of liquidity get sucked out by new issuances, there will be an impact on the secondary market - whether we like it or not.

Credit policy

Frankly, there has been a lot of discussion and debate about this. To that extent I would imagine that whatever the announcements will be, are not going to be unanticipated by the market. To that extent, it is not likely to have a material impact on markets.

Withdrawal of fiscal stimuli

The Government has been hinting about withdrawal of excise benefits etc and industry has been requesting a phased withdrawal. Companies are anticipating this and if the demand environment continues to pick up, they should be able to pass on some of the cost increases. I really don't think that these issues will lead to any kind of serious impact on the market and market is in a way already factoring that in.

WF: News flow from China and US seem to have spooked world markets, including ours. How serious an impact do you see these issues causing for us in India?

Harshad: What is happening in China is important in terms of what they are going to do in terms of lending slowing down etc., We could see an impact on emerging markets as a whole - there can be a synchronous impact I think. Commodity prices could be impacted significantly by actions in China.

What is happening in the US is very important for all markets - because it has the potential to reduce risk appetite globally. Reduction in risk appetite can affect all asset prices across all markets - so we have to be very watchful about these developments.

In terms of impact on companies - there will be some winners and some losers - especially if commodity prices come off.

WF: How deep a correction do you foresee, because lot of people only time will tell they are right but how deep can this be?

Harshad: To be honest, before this new angle of the bank restrictions in US came in, our view was that the correction will not be too deep, and it will not be too prolonged. The logic behind that argument was that there were many investors who completely missed out on the rally last year, both institutional investors as well as the retail investors.

We will have to see how this new US announcement pans out. If the idea is to restrict prop books and reduce overall risk, it can also result in overall risk appetite shrinking somewhat - which can have a deeper impact than a short term correction. People may not run to buy at the first sign of a 5% correction - just as they have done in the last few months.

The way we look at this is that if we believe that the India recovery story is fine - as we discussed - a deeper correction than a normal 5% to 10% one, will infact be a great buying opportunity.

We believe that in the next 3-4 years, Indian corporates are very likely to report strong earnings growth - just like they did in the 2003-2007 period. We see earnings accelerating - and not decelerating. We see earnings upgrades coming through and not downgrades. As long as the fundamentals remain strong, corrections will be great buying opportunities.