The Reserve Bank’s policy rate hikes will likely come to a halt soon as a number of operating data points, such as the credit offtake and the sales growth of cement, steel, autos, etc, are softening dramatically, Girish Pai, Co-head, Institutional Equities, Centrum Broking, tells Krishna Merchant. Edited excerpts:
The markets have slipped around 8 per cent year-to-date (YTD). What, according to you, are the key reasons and concerns that have led to this performance?
On the domestic front, the reasons are higher-than-expected inflation, rate tightening, the earnings downgrade cycle, slowing demand in many sectors, cost pressure from higher raw material prices, wages and interest rates, a deteriorating fiscal situation due to higher crude prices and low investment growth.
On some of these factors, India has fared far worse than some of the other emerging markets (EMs). This has resulted in India’s under performance versus the other EMs.
Globally, equity investors are concerned that growth is softening as monetary and fiscal conditions become tighter. There are concerns whether the developed markets would see a slowdown once the stimulus is removed.
Also, the problems surrounding the debt situation of peripheral European countries have been receiving a great deal of attention in recent times.
Do you expect the second half of FY12 to be better than the first half?
Our base case view for a better second half (which is currently the consensus view) is driven by the view that we will see a soft landing from a gross domestic product (GDP) growth perspective – both in India (7.6 per cent is our estimate for FY12) and globally.
We expect inflation to come off in the second half of FY12 due to slower demand growth and likely lower financial speculation in commodities as liquidity conditions tighten.
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We do not expect a more than 25 basis point (bp) rate hike going ahead, as a number of operating data points like the credit offtake, the sales growth of cement, steel, autos, etc, are softening quite dramatically.
Also, we believe the earnings downgrade cycle would have ceased by the second half and hope there will be some movement on the policy front and investments will pick up.
The bets would be off if we see sub-seven per cent growth in India or we see a financial accident in the developed markets of some sort.
How do you expect the markets to pan out, going ahead?
If our base case view on the economy plays out, we believe the rally may take the Sensex to 21,000-22,000 by the end of FY12 (15x FY13 Sensex ‘EPS’). We peg the Sensex earnings in the range of Rs 1,400-1,450.
When do you expect the capital expansion cycle to pick up?
Unless the macro conditions deteriorate further, which is not our base case, we believe the worst is behind us. The investment cycle should pick up later this year on lower year-end inflation, rate tightening coming to an end and some governmental policy action.
Do you expect further contraction in the Ebitda margins of companies?
There is a slowdown in demand across multiple sectors (y-o-y in comparison with FY11) and factors like high raw material prices, wages, interest rates, etc, are not working out in favour of many sectors.
Therefore, we expect the Ebitda margins to contract. The banking sector would be impacted by low credit offtake and high cost deposits, while the information technology (IT) sector would be impacted by large wage hikes.
Revenues for frontline IT stocks such as Infosys and Wipro were below estimates in the last quarter. Do you see things improving?
We have been cautious on the IT sector from a structural perspective since October 2010. We believe the medium-term demand growth may not be as strong as the market is anticipating.
The strong growth in 2010 was due to one-offs and large spending by the BFSI (Banking and Financial Services) segment, which may not be repeated in 2011.
We believe some of the Indian companies would now fall in the top 5 bracket from a volume perspective and to expect them to grow at 3-4x the market growth for two-three years is unreasonable.
The companies that have very large exposure to the BFSI sector will be impacted by the hit on profitability.
Which sectors, in your opinion, are likely to do well in FY12?
If our base case view on the Indian economy (of a soft landing) plays out, the banking sector and infrastructure-related sectors would be two areas that might likely outperform the market over the next 12-18 months.
