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Where do you think the markets are heading given that Sensex at current levels more or less factors in the hopes of revival in the earnings? Is this rally sustainable?
We think there is over exuberance in the markets. Some of the steps taken by the government are in right direction but implementation their real impact will be seen only in the long time. On the earnings front corporate earnings in India are likely to remain muted in FY13. We expect pressure on revenue growth although margins have bottomed out & may see marginal improvement. Government policy action may take longer time to result in revival of GDP growth hence revenue growth may remain muted albeit with improving bias. Street is over excited on corporate earnings coming back to 12-15% growth in FY14 however we expect some risk of disappointment there. We are estimating 8-9% earnings growth in FY14 over FY13. Probably street will need to downgrade/mute down expectations in this regard over next couple of quarters.
What do you think the upcoming Union Budget could mean for the markets?
Union Budget 2013 will be a keenly watched on two counts –first on fiscal deficit targets (current govt estimates are 5.3% of GDP). Chances of slippage on this target are quite high. Even if the number is achieved somehow by window dressing etc like suppressing expenditure, the market will look for finer details how the fiscal deficit target was achieved. Second -market will look for fiscal deficit target for next year which will depend upon various social programs announced in penultimate year of general elections. Any allotment of resources towards the likes of Food Security bill or expansion of social programs may not be liked by the market.
What is your assessment of the results of December quarter when do you think the earnings cycle to turn and what are the factors that will contribute to the same?
Till now earning season has panned out as expected. However major chunk of tier 2 companies & those that are likely to report muted to poor numbers are yet to come out with results. Whatever numbers are available till today it is clear that there is pressure on top line. Growth momentum in top line has come off significantly. This could be due to overall poor macro scenario. There is lot of variability or dispersion within the sector that means some companies are showing strong growth while others are showing pressure within the sector. Margins seem to have bottomed out & inclining towards positive side although any sharp up move in margins is not yet seen. Since Rupee has remained more or less in the small range in QoQ terms, there is forex gains in Q3FY13 compared to forex loss in Q2FY13. Earnings cycle can revive & come back to 15% year on year growth only if macro environment improves. Revenue growth follows from macros & this in turn leads to operational leverage. Reduction in interest costs will help in improving profitability.
We have seen rally in the markets primarily fuelled by the sentiments and the liquidity. What are the risk that we currently face in terms of the foreign flows given that if the other emerging markets becomes attractive viz a viz India could there be selling in the markets?
Global liquidity is in abundance with both ECB & US FED continuing support programs. Now Japan has also joined the club. India has been a big beneficiary of global “Risk on” trade & liquidity factor. However, going forward we expect China to be a major contender of this liquidity as there are initial signs of revival in Chinese economy & Chinese stocks have not performed since last many years. We do not expect global liquidity to dry up for India but surely there could be relatively much lesser amounts allocated to India compared to China.
Will it be wise to look for some underperformers or the high beta stocks in the capital goods and the construction space?
A bit of risk can be added to the portfolio as there are fair chances that most of the beaten down sectors and stocks may be beneficiaries of whatever little action taken by government. Thus we think OIL & Gas, Power and Energy could be the sectors to look for. Government has to meet its divestment target as well as comply with SEBI requirements on minimum float, hence there will be a lot of supply of PSU paper. We like many of the PSU stocks because of their almost monopolistic nature, large size & trading at cheap valuation. Any positive policy intervention can result in huge delta in these stocks. Power related cap goods manufacturers like BHEL are our contrarian buy. Transmission company like PGCIL & generation company NTPC are our other preferred picks. Since we expect capex cycle to take some more time to revenue, we will stay away from construction companies. However within this space EPC players like Rinfra, MBL Infra, IL&FS Transportations are our picks. We continue to stay away from highly leveraged companies as we do not see any major improvement in their future prospects. Thus we remain away from real estate developers like DLF, Unitech etc.
