See slight slowdown in earnings growth: Rel MF

Sunil Singhania of Reliance MF has a view that with abundant liquidity, 50 bps CRR hike should not impact much. He adds that RBI has been a bit more conservative and feels that people are still taking call on mkts due to strength in economies and earnings.

Excerpts from the exclusive interview with Sunil Singhania:

Q: What is your assessment of how the stock market will take the CRR hike?

A: We don't expect too much of an issue with the CRR hike for few reasons. Some kind of action from the reserve bank was definitely expected. I think with the CRR hike coming in before the policy, there would be expectations that at least for the time being, there won't be any more reactions by the RBI, which would be sort of a positive because there was also a possibility and the market was factoring-in some kind of a repo hike also.

So, I think on April 29, there is the expectation that this would be for the time being, the markets might in fact react a little bit positively. Having said that, I agree with Adrian's remark that we are in a phase where tightening is going to be the order of the day. We have seen this happening in countries like China. In India also I think RBI has rightly been a little bit more conservative and if the market feels that it is going to be a measured sort of increase in CRR, there should not be any problem.

The other thing is that this month is usually the month where liquidity is easily available in abundance. So, I think in this kind of a scenario, a 50 bps CRR hike should not be a big problem.

Q: Typically in the past, high inflation, tightening monetary scenarios are not great backdrops for equity market outperformance. Do you think this time could be different or do you think upsides will be capped by the kind of environment we are working in?

A: Actually funnily, last four-five years have been periods where all the economic theories and market theories have gone for a toss. Who would have expected the market to touch 20,000 and oil at USD 100/bbl, copper at USD 8,500 and so on? So it is scenario where a lot of things are happening unusually. It is basically a scenario where people are taking a call and despite whatever is happening, there is strength in a lot of economies, corporate profitability. We are seeing mixed results coming in from the US also but most of the company, the larger ones have been declaring excellent results. In India though there might be a slight slowdown in the earnings growth, there is no doubt that the companies by and large would keep on growing. As long as we feel that these kind of extraordinary events would be passed through by proper actions, there is optimism in the market.

Q: The other big event of the last few days is the come back of IT. As a fund manager, how are you approaching that space now?

A: I think we were quite lucky in taking a call that at least as far as the larger IT companies are concerned, there was merit in investing. We have increased our exposure a little bit on the IT space. I think the call is very clear. You have large companies that have been generating net profits of nearly USD 1 billion year after year. The growth rate is slowing down but most of the large companies are hopeful of maintaining at least 15-18% growth. We are seeing a scenario where the rupee at least in the near-term looks like settling at around these levels. So, the concern of the currency continuously appreciating and thereby impacting the IT companies have also been behind our back.

I think the major thing is that if we believe that the US might be close to a revival then that negativeness of Indian companies being impacted due to a recession in the US might also be behind us. I think most of it from a technical perspective, in the last one to one and a half years, IT companies have not performed. Over the last two-three months, there have been a lot of shorts that have been built up into the IT companies. So, both from a fundamental and technical perspective I think there is still room for IT companies to move up further from these levels.

Q: How would you approach banks now after the CRR hike, we just saw banks coming back a bit last week, do you think that pull back may continue or they will pin down by these interest rate concerns?

A: As far as the banks are concerned, there is definitely a little bit of a slowdown in the earnings potential and the fundamentals have been impacted a little bit but having said that, there has been a significant fall in the stock prices of almost all the banking stocks particularly on the private side because of sort of apprehensions about their Forex exposure losses, derivative and CDO losses, but our analysis and interaction in a lot of these banks clearly point out that most of these concerns might be old and there is obviously some short term pressure on their net interest margins due to increase in deposit rates without commensurate increase in the PLRs, and because of the 4-5 CRR hikes which we have seen over the last 6-7 months,  our view is that over a longish period of time, credit growth in India will continue at 15%-18%, there has been some benefit which has come out of the reprising of the bulk deposits, last march we saw bulk deposits at a high rate of nearly 11.5%.

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