On a day, when Infosys disappointed the Dalal Street, Nirmal Jain, Chairman of IIFL cautioned that safe sector such as FMCG and banks could also disappoint with their fourth quarter earnings.
"Maybe there can be some unpleasant surprises in earnings maybe not to this extent but to some extent in FMCG sector as well as banks," he said.
He explained that consumption has slowed down in FMCG sectors and some product categories may get impacted which may result in companies falling short of analysts and market expectation.
"The expectations of negative surprise would be more in PSU banks, but even in private sector banks one has to be cautious. It may not be as bad as PSU sector but there can be at least some lower than expected result," he said.
After dismal results of Infosys, Jain expects that there can be some contraction in price multiple of the counter. He indicated that the stock can be even downgraded by brokerages. However he stressed that Infosys results does not represents entire IT sector.
"Today, all the IT stocks might have corrected in tandem or in sympathy with Infosys but my sense would be that you will see a mixed performance from IT companies and many other IT companies will deliver good results," Jain said.
He advised there was no need to become too bearish about the market, but be selective and invest with long term perspective.
Below is the verbatim transcript of the interview
Q: What would your approach be towards Infosys after the disaster that we saw today?
A: We had a negative view on Infosys and our negative view is now further corroborated by two things one is this company was highly respected for predictability and not surprising investors as well as analysts. However it happened on the positive side last time and immediately followed by negative one. More importantly if you compare this with peer group or the large IT companies like HCL Technologies, Wipro, TCS, Infosys is growing at a much slower pace, it is growing at an annual basis organically by 5-6 percent as compared to 15 percent plus by other peer group companies. So obviously investors would look for a higher growth as well as they will look for higher predictability and certainty in terms of guidance as well as performance. So whatever fall we are seeing in the market is entirely concentrated on Infosys. The rest of the market has been pretty okay at least till now.
Q: Would you reckon that there is a case for the price earnings multiple to contract a bit more and maybe Q3 was a bit of a fluke and again for the stock to go back and trade at low teens in terms of valuations?
A: The price multiple can contract because historically Infosys has commanded a premium over the sector and was considered as a bellwether stock in the sector. However, if there is a growth slower than the peer group and also the earnings guidance and predictability by analysts as well as by the investing community becomes low; then that will mean down rating. Most investors don’t like these kinds of volatile movements that a stock that was highly respected, showcase stock or a poster boy for India's IT sector gives guidance on the positive side last quarter and then suddenly it turns to negative.
So, investors don't like this and that would mean de-rating in terms of multiple as well. As I said that if company is passing through transition phase then it has been a great company for a long time, but we are seeing leadership changes and with that the business and the client mix everything is going undergoing a bit of a transformation. So, in this transition phase there is a possibility of a bit of a de-rating. The multiple can now be at a discount and the discount can widen with the peer or with other IT companies that are performing better.
Q: Would extrapolate Infosys's commentary as a weakness that the entire IT industry might face or do you think Infosys is isolated in its troubles because this is the first time that we have seen Infosys give no EPS guidance so clearly they are expecting their own margin performance which is expected to be worse than what it is currently. Do you think that the other IT companies might start to face this pressure as well?
A: I don't think so, at least our analysts those who have been talking to all the IT companies the sense that we are getting is Infosys problems are not representative of the entire sector. Today all the IT stocks might have corrected in tandem or in sympathy with Infosys but my sense would be that you will see a mixed performance from IT companies and many other IT companies will deliver good results. The problems that we are seeing at Infosys are more or less isolated to the company and not sectoral or macro view of the sector.
Q: The other two legs or the other two sectors which have been supporting the market in this downtrend were banking and fast moving consumer goods (FMCG) especially the private sector banks do you get a sense that if we get a bit of a liquidation in the market then the next leg of the market fall could be led by private sector banks and in that case the market may not expect any levels that we are talking right now like 5400 to 5500?
A: I think you are right. Maybe there can be some unpleasant surprises in earnings maybe not to this extent but to some extent in FMCG sector as well as banks.
In FMCG sector consumption has started slowing down. There are different product categories not all will be impacted, but a few will be impacted and some of the FMCG companies may not meet analyst or industry expectations in terms of earnings growth.
In banks also there can be surprise whereas the expectations of negative surprise would be more in PSU banks but even in private sector banks one has to be cautious. It may not be as bad as PSU sector but there can be at least some lower than expected result. So, both these sectors can see some correction but maybe driven by corporate earnings and earnings of the large companies in these sectors.
Q: What is your prognosis for the market itself? Do you think that this is a good time to be putting some money to work considering that we are sitting at 5-6 month lows or do you feel that one could get better levels in the market in the times to come?
A: It is a good time to look at this market from investment perspective for long-term investors. So we talked about negative earnings expectations that happened in Infosys and maybe a few companies, Fast Moving Consumer Goods (FMCG) and banks can also surprise negatively, but besides that if you look at other IT companies or if you look at pharma sector, if you look at other companies and say FMCG sector also then I think we will have probably a mixed season for earnings.
On the other hand the Foreign Institutional Investor (FII) should continue to flow because while we are seeing the negative political and other development, but underlying, I think major problems that India faced on fiscal as well as the current account deficit (CAD) front were all because of crude oil and gold and primarily because of crude oil prices.
So, have been seeing correction in crude oil prices and commodity prices can also correct on the whole and that will be positive for India because India is a net importer of commodities of non-agro nature. So, crude oil prices coming down, gold prices coming down will ease our burden of CAD, will also ease fiscal deficit and therefore we should also see that macro variables start improving from next quarter and investors, they always try and forecast and move their money on that basis. So after the earnings season is over this month, flow of FII money can resume, unless there is something unexpected or something more negative happens on the political front.
So, I wouldn't be too bearish on overall market, but one has to be selective. So, this is a market where you will see negative and positive undercurrent mixing with each other and one has to be looking at stocks on bottom-up or on a very selective basis in different sectors.
Q: In that case what is the portfolio call because market normally would discount these events ahead of time? Would you say that investor should then remain with the comfort of pharma and FMCG for some more time or as you said maybe if they call is to go bottom up then maybe look at some of these high beta names infrastructure and couple of other sectors and look at them right now, what is the portfolio call in that case?
A: I would say that infrastructure is just avoid because I don’t think anything is happening on- although great expectations were aroused when things started moving on reforms in terms of diesel price hike and capping the domestic gas subsidy and things like that. However, nothing has moved in terms of say power sector or mining or even infrastructure on the whole and therefore – even if things start moving at government front many companies are heavily debt ridden and they are overly leveraged. So, avoid that sector at least in near future, so the broader market call will be bottom up but the sectors of choice would be IT as I said other than Infosys, pharma, also look at oil and gas.
Companies like Oil and Natural Gas Corporation (ONGC) will see significant easing of the subsidy burden led by diesel price hike as well as fall in the crude oil prices globally wherever they import where in oil marketing companies. So, be selective but invest in equities from a longer-term perspective. Markets can be volatile, there can be negative news from Europe or anywhere else and that would send jitters but valuations have become attractive in many sectors and I don’t think one should write-off India or Indian economy or Indian market on the whole.
Q: The other issue which has been highlighted over last couple of weeks is the whole fight between National Thermal Power Corporation (NTPC) and Coal India. Purely as a stock what is the call on Coal India now which has again started to underperform?
A: I have not been tracking it in terms of the fundamentals of Coal India. NPTC looks good in terms of valuations, but I do not have too much of immediate inside into this.
Q: Tata Motors is up 8 percent this week and we have seen some fairly good numbers coming in from Jaguar Land Rover (JLR) this time around. What is the house call on the stock itself and any recommendation?
A: I am not updated with the house call. Jaguar’s numbers have been very ositive on one hand, but on the other hand auto industry has not been doing too well domestically and so relatively probably people will shift their portfolio weight to companies like Tata Motors, but within auto sector otherwise the numbers have been pretty dismal. Only hope is that depreciating Yen would benefit companies like Maruti and Hero Honda, but other than that domestically sector is not looking too great.
Q: Would you buy Reliance Industries ahead of its earnings next week?
A: I will not. The gas production is falling month after month and that is key worry that one has on that stock.