Earnings growth will need to pick up to attract foreign flows: Eleswarapu

Q&A with Abhiram Eleswarapu, Head of equity research, BNP Paribas Securities India

Given the strong growth in Asia and easy monetary stance taken by central banks other than the US Federal Reserve (US Fed), overseas investors will soon start re-investing in risky assets, says ABHIRAM ELESWARAPU, head of equity research, BNP Paribas Securities India. 

In an interview to Samie Modak, he says expectations are on the higher side for India. If growth doesn’t pick up, then there are chances of more downgrades. Edited excerpts:

How is the Indian market placed relative to other regional peers?

From a fundamental standpoint, in India we have seen earnings downgrades so far this year, probably in the range of five-seven per cent. If you see the first quarter results, large-cap index earnings were down about 5-10 per cent year-on-year. Consensus forecasts call for mid-teens earnings growth for FY18. Given the weak first quarter, arithmetic for earnings growth in the remaining three quarters becomes a little difficult. On the other hand, several other markets in Asia are seeing earnings upgrades. In that context, India stands out as a market where expectations are on the higher side.

What are your earnings forecast?

The consensus is for 15-16 per cent earnings growth in FY18 and 20 per cent-plus in FY19. On the face of it, that looks aggressive as we are coming out of three to four years of poor earnings growth. Also, as I mentioned, the first quarter wasn’t great. So, growth needs to pick up. Otherwise, there are chances of even more downgrades. On the positive side, there is the low-base effect, which will come into play for the second half of the year. The challenge is to see an immediate improvement in earnings, which has to continue for the rest of the year. 

What is the foreign flow outlook?

From the flows perspective, we started the year with a bang. In the first two quarters, foreign flows were good. In the last two months, however, we have seen consistent outflows. We have lost $8 billion out of Asia, of which a quarter has gone out of India alone. Emerging market (EM) funds are getting positive flows even now. But they seem to be taking money out of Asia and investing in Latin America. Given the strong fundamentals in Asia, we think the flows will return at some point, particularly as investors have lately gone underweight on Asia in favour of Latin America. It remains to be seen which part of Asia accounts for those flows when they resume. We believe (India Inc’s) earnings growth will need to pick up to attract good inflows.

Do you expect the recent sell-off to continue or is there any scope for reversal?

We believe there is a strong correlation between the global central banks' combined balance sheet growth and GEM (global emerging market) fund sizes. The central bank balance sheet growth tends to lead EM flows by about a year. Even as the Fed cuts down QE (quantitative easing), there is expansion expected elsewhere. Until about this time next year, you could still see some year-on-year expansion. So, the flows into EMs will likely be positive until that point, if not beyond. That’s why we are of the view that the recent outflows will come back at some point. 

How does one play the market?

There are some bright spots in the economy and the stock market. If you look at consumer discretionary areas — auto sales, airline ticket sales or flows into mutual funds — all have been healthy. All these are symptomatic of higher disposable income in the middle-to-upper-middle segment. We are therefore seeing premium products getting sold a lot faster. This is showing in consumer discretionary numbers, which are generally strong. So, while you can go with a top-down approach and take a view that valuations are expensive; you could look at it differently from a bottom-up perspective. 

When you take that approach, it is not just consumer discretionary stocks that become plays, but disposable income in general. Therefore, one can also look at sectors such as insurance, NBFCs (non-banking financial companies), housing, etc. All of these areas are doing well. In general, we are positive on private financials and consumer discretionary companies. We also have selective positions in utilities, staples and technology in our model portfolio. 

What is BNP Paribas’ year-end Sensex target?

Our Sensex target for December 2017 is 32,500. So, effectively, we think it will be a flattish market. It brings me back to the bottom-up approach. I talked about — you will still be able to find stocks even in a flattish market.