Tarun Sisodia, executive director (Institutional Equity), Anand Rathi, spoke to Priya Kansara Pandya on profitability concerns, rising interest rates and the preferred sectors to invest in
What is your view on domestic issues such as high inflation, rising interest rates and the high current account deficit?
I believe that most of these concerns will wane as the year progresses. We expect inflation to fall to 6 per cent by March 2011 and remain at an average of 6 per cent for FY12.
On interest rates, I expect a 25 basis points (bps) rise in the January 25 policy review, and then another 50 bps hike during FY12. Government yields are expected to fall by March 2011.
As regards the current account deficit, I expect it to be $45 billion in FY11 and then come down to $32 billion in FY12, driven by moderating trade deficits and better inflows on account of software services and remittances.
Do you expect profitability to be under pressure in Q3 on a year-on-year basis?
As long as margins are under pressure to achieve the growth targets, it is positive for the markets. In my view, this is going to be the most likely scenario. We expect 20 per cent growth in earnings in Q3 FY11 and 18-19 per cent growth till FY12, which is good.
More importantly, the quality of growth will be far better than the previous years due to three main reasons. One, the current growth does not benefit from the poor base growth of last year. The benefits of the base effect ended in Q2 FY11 while the growth from Q3 FY11 onwards will come on a higher base. Two, growth would be more broad-based with almost all sectors participating unlike previously when metals contributed 50-67 per cent of the incremental growth.
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Three, all the previous four quarter growth numbers were largely influenced by just two major companies, namely Tata Steel and Tata Motors. Going forward, the influence on growth of these companies will reduce drastically as the growth becomes more broad based.
Which sectors are you bullish on?
I expect short-term (3-6 months) pressure on the markets (Nifty in the lower range of 5,000-5,200) and hence would prefer a more defensive portfolio. I am overweight on technology, consumer and healthcare and underweight on capital goods, metals, auto, power, infrastructure and property.
However, we expect the long term (12 months) to be bullish (Nifty in the upside range of 6,300-6,500). We think the investment theme-based story will again pick up and thus related sectors like capital goods, infrastructure, construction, cement and banks will be back in the limelight.
