Inflation to impact corporate profitability: ICICI Pru AMC

Q: Terrible day for the market. But what is it telling you, these kinds of up and down moves of the last few days?

A: It just says that the market has not yet settled. There are a fair amount of event risks that are still facing the market. So notwithstanding what the fundamental picture may look like and which is albeit deteriorating a little bit with inflationary concerns, the event risks are still weighing on the market and the market is not going to go in either direction in a hurry.

Q: But what was the principle reason for the collapse today? Do you think it was inflation or interest rate led fears or do you think it was ICAI or fears of some earnings hits coming? What do you think spoiled the mood completely?

A: I think the starting point was that on Friday itself, the market was a little bit on the higher side, above its normal average. So, one is, the base itself was higher.

Secondly, over the weekend when ICAI came out with guidelines that the corporates will have to disclose their financial derivatives position, it is a step in the right direction. But from a market’s point of view, it came at the wrong time because anyway the sentiment was bad. There were lots of rumours about the treasury losses hiding in the corporates’ balance sheet and now all those numbers will be available in a transparent manner.

The third was the inflationary concern and the likely steps that the government will have to take to control inflation. It could mean tight liquidity, higher interest rates, price controls and also mean sacrificing growth. All those things while good from an inflation control point of view and from the long-term economic growth point of view, in the short-term is going to impact corporate profitability and hence probably all these three things combined together, the market had no option but to come down. It also got no support from the global side. The global weakness also resulted in a kind of free flow for the markets to go down.

Q: How are you reading the inflation data and all the talk that is swirling around that you can now forget about an interest rate cut and you have to start worrying about interest rate hikes? How do you see the rate-sensitives performing from here because they are getting hit the hardest?

A: In the short-term, may be inflation will be controlled artificially by tightening liquidity, raising interest rates, curbing demand, and cutting import duties. But at the end of the day, the only solution lies at the longer end in creating supply and for that you have to channelise liquidity for building capacities. The RBI and Ministry of Finance know these realities and hence interest rates may not be raised, but liquidity may be tinkered to ensure that the asset price bubble does not reflect. With the stock prices correcting and the real estate prices softening, some of those objectives are already achieved.

From a market point of view, the rate-sensitive sectors are essentially automobile, banking, and those kinds of consumption related sectors. Apart from inflation concerns, they are also right now struggling on the treasury and FX derivatives losses. The banking and financial services are the hardest hit. The automobile sector notwithstanding the excise concession given in the Budget again is not benefiting as much as one would have expected it to be.

In an overall volatile and uncertain scenario, all rate sensitive sectors will continue to suffer.

Q: Do you think the ICAI disclosure fears are legitimate, because today IT and private banking took a knock because people believe that now they will have to disclose some losses this quarter? Do you agree with that view and do you think the punishment is warranted?

A: A known devil is always better than an unknown devil. So, I will rather be aware transparently what is the loss and deal with that rather than keep on guessing as to what kind of losses could be there.

The ICAI guidelines are a step in the right direction. It forces companies to disclose transparently what they have done and clearly everyone knows that these are all mark-to-market losses and not necessarily booked or losses that need to be paid for. So, transparency is always welcome. However, the market has kind of taken this a little bit negatively from a timing point of view. Over a period of time things will settle down.

The tech sector meltdown is not necessarily because of just ICAI guidelines; it is also to do with what kind of guidelines will be given for the next quarter? Will it be for the full year or will it be just for the next quarter? There is a lot of uncertainty on the US economy and also the rupee has appreciated. So, the tech sector meltdown probably is more a function of the rupee appreciation, the weak US data that has continued over the weekend, and the ICAI guidelines.

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