Expectations from the fourth quarter earnings season are not great, says Lakshmikant Reddy of ICICI Prudential Life Insurance. Talking to CNBC-TV18, he says that in an otherwise dim earnings season, one bright spot could be the IT services sector.
"In the entire aggregate corporate earnings, IT sector results are going to be one of the more important ones as expectations of a turnaround in the growth rates of this sector in FY14 are high," he says.
Talking about the market, he says we are pretty much at the bottom of the range as far as the index or the valuation is concerned.
Here is the edited transcript of his interview with CNBC-TV18
Q: What are your expectations from earnings season this time around and how do you think Infosys will perform in its numbers on Friday?
A: As you rightly pointed out, the expectations from the earnings season are not really great. As a matter of fact, we would probably be seeing after a long time the aggregate corporate earnings are not showing any growth at all on a year-on-year basis.
So we would see very weak earnings from a lot of domestic cyclical as well as global cyclical sectors. In that entire earnings season, one bright spot that is expected on which a lot is riding is the IT services sector. This is because both the industry body and many companies’ managements have been speaking in the last few months about the next financial year being better than the last one. In other words, they are looking at a turnaround in growth rate in industry and specifically coming to the company that you are talking about the same thing there as well.
FY13 has not been a great year in terms of growth, and the expectations are that both the fourth quarter numbers as well as the commentary that they might give about the FY14 will be supportive of the expectation that the next year is going to be a revival year.
I would say in entire aggregate corporate earnings, IT sector results are going to be one of the more important ones because there is an expectation unlike most other sector that there is going to be a turnaround in the growth rates of this sector as far as FY14 is concerned.
Q: What would your take be on the market? It has been quite volatile in the past couple of trading sessions. Where do you think we are placed in terms of a possible cap and what do you think is the big factor which is governing the volatility that we have been seeing?
A: Our own internal view is that the state-owned utilities, oil and gas companies, private sector commodity companies, infrastructure companies, capital goods companies together comprise a large part of the market, maybe two-thirds of the total market.
They are all trading at very, very depressed valuations. In many cases the valuations are even lower than the lows that they have seen during the global financial crisis peak that is sometime in 2009. So as such, it is very difficult to see at least that part of the market actually seeing any significant fundamental downside.
Because of that we believe even if some of the richly-valued sectors, be it the private sector financials or a few consumer names, were to disappoint, the next few quarters if economy remains weak, it is very difficult to see the aggregate market actually going down significantly.
As a result, our own view is that we are pretty much at the bottom of the range as far as the index or the valuation is concerned, maybe a few percentage points here and there, but we do not see a significant downside from the current levels.
As regards your question on what does it make of the volatility I guess perhaps we have seen some change of hands as far as the stocks are concerned. The people who have been net buyers through the last year have turned net sellers maybe.
Perhaps even the volume of trading has been weak in the last few days and therefore you see some significant moves in from single stocks although the index per se has not moved that much. Perhaps this is going to remain like this through the results season. We would see some single individual stock level volatility where the market per se would be in the plus or minus a few percentage points.
Q: So should I be putting any money to work at this point in time? And if yes, which are the sectors I should be looking at?
A: I can only speak of the way our portfolios are positioned. We have seen economic growth coming off from 9 percent to 5 percent. It is not very clear that we are going to see any revival in the next few quarters. If revival has to happen, it is probably be back-ended, if not next year. That being the case, one has to invest in those companies where the risk-reward is on your side. One has to be patient.
The way we are looking at it is that in any case, barring a few sectors and a few stocks, the earning growth is negligible-to-non-existent in most companies. So, we are looking at companies where the balance sheet is clean and the company is very cheaply valued.
So when things do turnaround, there is enough upside for you to make up for the lack of returns for extended periods of time. So, three are many companies like that. For instance, we have many core sector government-owned companies, which are very cash-rich, which are cheaply valued.There are some companies in the auto space and there are one or two companies in the cement space.
So, there are many companies which are cheap where there may not be any immediate gratification, because they are not going to be significant catalysts in terms of earnings etc. But a year or two down the line, one would hope to make significantly better returns than what one would make just sitting on cash.
Q: We have the Reliance Industries numbers as well next week. What is the sense that you are getting about that particular trigger for the market and how Reliance may perform this quarter around?
A: I would find it difficult to comment on individual company, but I guess the expectations are that given what we have seen the strength in the JFM quarter for the refinery margins, we should expect most of the refineries to report on a y-o-y basis fairly strong numbers as far as the refining business is concerned. Of course, the company that you have mentioned also has certain other businesses including oil and gas exploration where the throughput on y-o-y basis has seen some downside, but as far as the aggregate profits are concerned, it is one of the stronger numbers that we will see this quarter.
Q: Friday is going to be an important day from the macro perspective as well. We have the Index of Industrial Production (IIP) data which is coming out and we have the Consumer Price Index (CPI) data for the month of March. What is your expectation on both of these parameters and do you think that they are going to be market moving at all or do you think that the worst is factored in already?
A: We do not see the market moving. As a matter of fact, if you see one of the things about the last financial year has been the significant divergence in the IIP and the CPI. As a matter of fact the IIP numbers have at least softened quite a bit in the last six months, whereas the CPI continues to be in the double digits. Our expectation is that this year the divergence would converge and both of them would trend downwards.
As such I do not expect them to really cause any significant flutter either in the stock or the bond markets as far as the CPI and WPI numbers are concerned.
As far as IIP is concerned, monthly numbers have been extremely volatile, so we do not really react that much to monthly numbers. But if you look at three months moving average it shows that the manufacturing sector has pretty much been stagnant y-o-y and I do not see that would have changed the particular number that we are going to see.
Perhaps we will see improvement more like in the second half of the year, rather than any immediate uptick. Having said that, single month numbers of IIP have been extremely volatile. We do not really make too much of it, whether the number is big uptick or a big downtick.