Vikas Khemani, head of Edelweiss Financial’s wholesale capital markets business, speaks on the bearish and uncertain economic indicators to Puneet Wadhwa.Edited excerpts:
The markets have witnessed a lot of volatility over two weeks. How do you expect these to pan out?
The markets have been struggling to stay afloat. On the global front, Europe took centre-stage with a powerful cross-current of events roiling the markets. On the domestic front, a poor earnings season, downgrade of banks by Moody’s, huge current account deficit and a depreciating currency played spoil-sport. Given the situation, it appears the financial situation is far from stabilising. The only positive is that pessimism seems to be consensus.
How different are we from the Lehman times?
The euro zone problem was always known and so was the situation in the US.
In some sense, the ongoing crisis in Europe is an extension of crises that unfolded in the US in late 2008. The crisis has just grown in proportion and it is crucial to note that at the time of Lehman collapse, there was enormous fiscal and monetary firepower with authorities around the globe. So, we saw synchronised policy stimulus that helped bring about a sharp pullback from the brink.
Today, fiscal firepower has clearly reached its limits and monetary support (Fed, BoE, etc) is also now proving ineffective. In the emerging markets as well, while monetary firepower is available, fiscal support will be largely missing. This seems to suggest the economic leg-down this time may be prolonged.
How has the September results season of India Inc panned out? Were there any positive/negative surprises?
The results were largely disappointing. There was high input and interest costs and adverse currency movement. While the profit growth for Sensex companies has been a disappointing six per cent%, what has been disconcerting is the decline in momentum in sales growth, expected to be below 20 per cent from a strong 25-plus per cent in preceding quarters.
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Earnings were below expectations in capital goods and metals. In power, the results were more or less in line with expectations but commentary points to significant stress ahead.
The gulf between asset quality of PSU banks and their private counterparts has widened but we expected this, as many PSU banks have migrated to system-based NPA recognition from this quarter. On the upside, we have seen some positive surprises from the fast moving consumer goods sector, but not enough to thwart the general downtrend in earnings.
Have you tweaked the earnings' estimates for corporate India for the remaining part of the financial year, given the domestic macro-economic issues?
We have reduced our FY12 estimates for the Sensex by two per cent during the earnings season. The bigger worry for me is the FY13 earnings estimates, currently at Rs 1,330, down by more than two in the current earnings season and almost 10 per cent down since the beginning of the year.
We are in a very fragile growth environment and with substantial downside risks to earnings estimates ahead, a de-rating to multiples cannot be ruled out.
How do you expect the rupee to do in the near to medium term? How do you see foreign institutional investors taking in the movement?
In the near term, the rupee may hover around current levels, given the overhang of domestic and global concerns. However, over the medium term, if event risk recedes on account of some solution emerging from Europe or there is domestic macro improvement, it may see some appreciation, although we don’t see it regaining 44-45 levels in a hurry.