As high inflation and slowing GDP growth continue to take a toll on corporate earnings, Dinesh Thakkar, chairman and managing director, Angel Broking, tells Puneet Wadhwa the markets have factored in the worst. He expects the central bank to remain in a wait-and-watch mode regarding rate cuts. Edited excerpts:
How convinced are you about the market fundamentals and valuations? Where do you see the Sensex/ Nifty by FY13-end?
Off late, the markets have been discounting the good news and ignoring the bad news. They have reacted sharply to news flow from the Euro zone and how the rupee has panned out against the dollar. The markets can gain further ground if the foreign institutional investor (FII) flows continue and/or there are positive announcements from the government.
However, the drop can be equally sharp to 5,300 – 5,400 as fundamentally, the earnings growth doesn not look particularly good for the next two quarters. Monsoon will also be an important factor on how the markets pan out. From March-end perspective, there is enough good news to support a target of 5,700–5,800 for the Nifty.
Can you give us sectors and specific stocks within those sectors that are likely to be the top performers in FY13?
I am positive on some of the cyclical sectors like banking, capital goods and infrastructure. At this juncture, investors are getting high quality companies in these sectors at cheap valuations, not because there is anything structurally wrong with these companies but because of the short-term economic slowdown — which is likely to start improving.
Given how the interest rates may pan out, I also remain positive on the banking sector. Large private banks remain amongst the strongest structural long-term growth stories. Capital goods stocks have inevitably taken the maximum beating on account of slowing GDP growth, but investors need to ignore the current scenario when evaluating high-quality blue-chips in this space.
What about the realty/rate sensitive space in the light of how the interest rates may pan out? Is it time to shift out of defensives?
The imminent decline in lending rates will act as a catalyst for the real estate sector. So, from the current extremely beaten-down levels, stocks in this space are likely to give high beta returns.
As of now, within the defensive pack, pharma and information technology (IT) stocks look good. I also like print media stocks. Given the high brand loyalty nature of the newspaper business, they should command at least 15-20 per cent premium to the Sensex, but are now available at below fair value.
How much of a worry are the monsoons, crude oil prices and rupee level for you?
The monsoon deficit of over 20 per cent is a worrying factor, but it is too early to take a call. Very clearly, if monsoons are substantially below normal, the direct negative impact on agricultural GDP is evident and has its corresponding negative repercussions on overall GDP growth as well. Crude, though has gone back to $100, looks far less threatening than when it was at $125.
Have the markets and corporate earnings factored in the worst?
June quarter results for the index companies, as well as the broader set of companies we track will continue to reflect a tepid growth trend, as high inflation and slowing GDP growth continue to take a toll. For the year as a whole, markets have already downgraded EPS estimates and I don’t expect further downgrades.
How polarised do you think will be the results among the large- and the mid-cap universe in the June quarter as compared to the previous periods?
Sensex topline growth is expected to be about 14 per cent in the first quarter. Normalised earnings growth for the Sensex is expected at 9 per cent and for companies in our coverage at 11 per cent (excluding Oil & Gas sector, SBI and Tata Motors to eliminate distortions).
Defensive sectors such as FMCG, IT and Pharma as well as high quality companies in some of the cyclical sectors (such as private banks for instance) are expected to continue playing an anchoring role for corporate earnings. Put together, these sectors are expected to contribute 54% to incremental Sensex earnings growth.
Commodity sectors such as metals, mining and oil & gas as well as cyclicals and rate-sensitives are expected to bear the brunt of weak earnings. Put together, these sectors are expected to drag down Sensex earnings growth by 31 per cent.
How aggressive do you expect the Reserve Bank of India (RBI) to be in cutting rates in FY13 given the growth estimates and the inflation data for June?
What has made the RBI’s job challenging is that although growth readings continue to decelerate sharply, inflation is still not low enough in absolute terms to comfortably cut rates. So, it looks like the central bank will have to maintain a wait-and-watch approach and probably delay the pace of rate cuts over a longer period of time.
