Jan 13, 2017 02:44 PM IST | Source: CNBC-TV18

Quarterly results may be much worse due to note ban: Dalton Cap

According to UR Bhat of Dalton Capital, corporate earnings for the quarter would be much worse than expected due to demonetisation.

Quarterly corporate earnings would be much worse than expected due to demonetisation says UR Bhat of Dalton Capital. 

A time correction is certainly in the offing as the market grapples with mid-single-digit growth numbers in earnings, he said in an interview to CNBC-TV18.

On the appointment of N Chandrasekaran as Tata Sons Chairman, Bhat says he will have to get down quickly to taking decisive actions on all lines of businesses, especially the ones which are there for legacy reasons. Bhat thinks there are "dramatic changes" that Chandrasekaran may have to bring about.  

"Given he (Chandrasekaran) has his Chairman emeritus breathing down his neck, I don’t know how much he will be different from what you expected Tata to be," said Bhat.

Below is the verbatim transcript of UR Bhat’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.

Prashant: How are things looking with the market, with all that has happened in the last 24 hours, earnings season is on us, we have had many large important numbers as well, what do you make of all of it?

A: Given the circumstances, they have done well; there is no question on that. However, the point is that for mid-single digit growth numbers in earnings, do you give them near 20 times valuations, or maybe 15-20 times valuations? I think this is something that the market has been grappling with for quite some time.

There has been a huge time correction if you see in quite of these stocks and I think it might continue. They are market favourites, so, therefore they may not really collapse. However, a time correction is certainly in the offing and as you have seen for the last several months now.

Ekta: I know you can’t talk stock specifically but there is a huge change which has taken place in the Tata Group, what are your thoughts?

A: I think the new guy there, N Chandrasekaran has to take care of all the problems that they have because there is a lot of litigation to and fro. So, I think that is what he is going to grapple with. However, in addition, there are lots of decisive actions that he has to take in terms of seeing whether all the lines of business are required or not, there are some which are there for legacy reasons which probably may not fit in to the new strategy. So, I think there are dramatic changes that he may have to bring about.

However, given that he has his Chairman emeritus breathing down his neck, I don’t know how much he will be different from what you expected Tata to be.

Prashant: The point you were making with regards to IT stocks, would you want to pay these kind of multiples for the growth that they are offering, but there are other paradoxes in the market as well. Just to use one as an example, not to ask your view for it, take Havells, 10 percent earnings growth, trades at 30 times P/E multiple, and there are many like that, compared to something like that isn\\'t it better to pay for IT companies, much larger enterprises, they have delivered for much longer, very strong cash flows, and still trading at 15-17 times?

A: I understand that, but IT is a generic business. There, at least you have some brands and some brand valuation is there. Traditionally if you see, the consumer goods companies have been trading at much higher valuations, I don’t know whether there is a great case for that but that is what historically has happened. However, here is a case because traditionally if you see they are always growing at about mid-teens or something like that and they are always valued at double that, that is the sort of FMCG goods space.

However, in the case of these generic companies, there is no great brand value there; everybody does the same thing, same coding is done. So, whether that sort of valuation mismatch is desirable is something we have to see because quite a lot of these companies have huge amount of cash in the balance sheet and therefore probably something like quarter to third of their profits come out of that returns from that. So, therefore, that is not something where you want to pay 15-20 times.

Prashant: You think kind of logic works on the minds of large investors when they look at it?

A: They are certainly working for the last at least a year or two because the stocks have gone nowhere and they are showing some earnings growth, if not an aggressive earnings growth. So, therefore there is a time correction that is happening for quite some time now because if you see these large stocks, they have been at these values for quite some time.

Prashant: My question was that is the reason why these kind of logic is the reason why they are still well bid at some level. They don’t come off very sharply, their gains have been capped as you said for a year, year and a half but there is no sharp downside.

A: There is no sharp downside because they are very important constituents of the index and if you want to be in India and if you want to play the index game, then you have to be there. That is probably the main reason why they are still bid up at these prices whereas I think fundamentally there may be a case for them to get de-rated a bit.

Ekta: There are three parameters which have come out to assess how demonetisation has panned out. IndusInd Bank numbers, South Indian Bank numbers, as well as the IIP figure which is at 5.7 percent, 13 month high for the month of November, your sense in terms of whether this earnings season is not going to be as bad as anticipated?

A: Earnings season might actually be good in parts because if you see immediately after demonetisation, there was a lot of cash that people wanted to dispose-off and so they bought into for example if you see petrol consumption during November, it was very good because that was one place, petrol pumps were one place where you could remit old cash.

So, similarly in so many other sort of purchases, small ticket purchases, I think there would be quite some impact. However, I think December is one that we have to really watch because that is when the impact was reasonably high. I think the quarterly results would be probably much worse than expected because I think despite what we are seeing in terms of IIP and other numbers, I think the impact on -- because all these people who were standing in queues, they were working somewhere, isn\\'t it, so, to that extent I think there would be an impact on the quarterly results of quite a large number of these companies and I think that is probably something that the market would be very keen to watch and price that probably deceleration in the earnings growth.

Prashant: NBFC results will be particularly bad?

A: I think the Reserve Bank of India (RBI) has given quite some concessions there in terms of recognition of NPA, but I think NPA creation would be there. However, whether you recognise as an NPA or not, whether you give them some more indulgence, RBI has been very liberal in that.

Prashant: That is one space where people are so cautious so there is room for surprise there on the upside maybe, the book may not fall, the quality of assets may not deteriorate as much as people were expecting, etc.

A: There will be certainly some pressure on the health of the book but if you don’t recognise it is NPA because rules have changed, then I think everything will look fine.
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