Amid a tepid third quarter in terms of earnings, Anish Damania, co-CEO & head, Institutional Equities, IDFC Securities, says there is a disconnect between expectations and actual numbers. Excerpts from an interview with Ankit Doshi.
Could you give us a gist of the earnings season gone by?
This was perhaps the worst earnings season in the past several quarters, with sales and adjusted net profit having declined 3% y-o-y to 5% y-o-y for the Sensex as well as the Nifty constituents. Hence, questions are being raised on the sustainability of the earnings growth that we saw in the first two quarters. As a result, we have seen more earnings downgrades than upgrades. However, target prices have not been cut and downgrade in recommendations have been few, considering the negative earnings surprises.
This implies that the market may no longer focus on this year’s earnings and will move its expectations to the next year. While earnings growth has deteriorated from the expectation of 17% at the beginning of FY15 to about 9% currently, that of FY16 remains at 17%. Indications of a falling interest rate regime and sharply lower commodity prices are expected to leave room for the government to improve its spending in FY16.
The results look fairly mixed. Does this mean earnings growth could move in either direction?
That’s right. There is a disconnect between where things are and what the numbers currently are. To that extent, we have seen private banks reporting good numbers, whereas public sector bank earnings have been disastrous. Within the consumer sector, companies like HUL fared better, but those like Havells and TTK Prestige reported poor numbers.
Maruti, for example, reported good numbers, while, on the other hand, Bajaj Auto and Hero MotoCorp have reported poor numbers. Earnings and demand trends are not only divergent intra-sectors, but also within each sector. It is clear that our economy has bottomed out, but what’s not clear is whether it will recover quickly.
Till we see some more concrete data, the earnings growth environment remains challenging. The driver of Indian equities is its relatively better positioning with respect to other emerging market economies.
Further, the QE programme continues. In FY16, the QE from Europe and, partly Japan, will drive liquidity and, therefore, the markets. The question to ask is, how long will such QEs last? If this is the last of stimulus programmes, somewhere in the middle of the year, you will start seeing its impact. Low growth and highly valued stocks will be very vulnerable. So, the idea would be to invest in companies where valuations look reasonable and growth prospects are positive.
Adopt a theme-based or stock-specific approach across sectors, rather than take a specific sector-based approach. Once again, the Budget appears to be the new harbinger of growth. Concrete steps like restructuring tax structures to usher in GST, incentivising household savings, containing/reducing revenue deficit by cutting subsidies and increased government spending would be the key.
So, how are you devising strategies keeping in mind the earnings and the Budget?
We are clear about selecting companies where earnings are stable in an unstable or sluggish environment. Also banks have a 30% weight in the Nifty. Bulk of it is private banks and financial institutions. Then, you have sectors like consumer, IT, oil & gas, and auto, in that order of weights.
The Budget is an important, near-term event, and we will reformulate our strategy based on what is announced there. Until then, banks is the way to play the asset story. We are looking at select utilities and some reasonably valued stocks with good growth prospects.
How are institutional investors viewing the markets?
In the last few months, domestic investors have started becoming net buyers in equities, especially mutual funds. The only sellers that we see are insurance companies, and largely state-owned insurance companies. From the FII point of view, I am seeing a more positive influence. Flows picked up when the markets shot up 10% in January-February. India is still among the preferred economies among emerging markets. And till the time they get good returns, they will continue to invest, despite high valuations.
