Nischal Maheshwari of Edelweiss Financial Services is worried that downgrades for third earnings is likely to continue. In an interview to CNBC-TV18, he explains that this is also due to no rate cut by the Reserve Bank of India (RBI) as it would have helped the companies to bring down their costs.
Below is the edited script of his interview with CNBC-TV18’s Latha Ventakesh and Ekta Batra
Q: Give us your summary view of the Q2 earnings. Did you get a sense that the downgrades have ended? If not then definitely thinned out and we could be seeing a season of upgrades?
A: Unfortunately the downgrades have continued in the current quarter also. People were expecting a rate cut as far as savings were concerned. A rate cut by RBI would have helped most of the companies to bring down the cost. The trend that I have been speaking about for the last two quarters is evident in the topline that continues to deteriorate. Couple of quarters back, on BSE 200, topline grew at around 18 percent but this quarter it came down to as low as around 12 percent. So definitely there is a pressure on demand. But the EBITDA margins as well as profit before tax (PBT) margins have now been stable.
For the last three quarters, though the topline has been going down, people have been trying to find ways to save costs for the company. In the last two-and-a-half years we have not seen much capex happening on the ground. One very interesting trend we have seen is that the depreciation continues to go down for most of the corporates. This time, the other income, as well as forex has helped. So, the margins have been maintained but the topline continues to deteriorate.
Q: With respective to the banking earnings this time around, how happy or disappointed were you with regards to the public sector banks? Some of them actually saw quite a bit in terms of worsening asset quality on a sequential basis. How worse do you expect the earnings to possibly get or do you think that it bottomed out in terms of asset quality?
A: I think asset quality was a mixed bag this time. There were some good bright spots like Oriental Bank, Bank of Baroda. Even State Bank of India was not as what people were expecting, given that last quarter they had a very large restructured book. So it was a mixed bag. In the last 3-4 quarters, we are seeing a clear bifurcation between private sector and public sector banks and I think that continues.
As far as asset quality is concerned, at least for 1-2 quarters more, the worry continues. We have not seen bottoming out as far as asset quality is concerned especially on the small and medium enterprise (SME) side because the interest rate continues to be high for them.
So, the worry still continues on the asset quality side as far as PSU banks are concerned.
Q: The non banking financial companies (NBFC) space has been doing well partly perhaps because of the lure of banking licenses, partly because of wholesale money also becoming cheaper. We have also seen the media space doing well probably because of digitisation and other longer term transparency factors. In these two spaces do you still see value? What are you looking at as an interesting picks?
A: In media I definitely see a very strong long-term story. In the last three-four years that is the only reform which has been done and has got implemented now by the government. Digitisation after the first false start has finally got implemented on November 1.
In digitisation, one can have his pick because I believe for the next three-five year the story is very strong on the media side whether it is broadcasters where we like Zee Entertainment, on the cable side, we like Hathway Cable and on the dish side we like Dish TV India . One can take his pick but I definitely see there is a long, strong trend out there in media.
As far as NBFCs are concerned there are pockets which are doing pretty well and so housing finance is one of them. There is no concern there, as far as the asset quality is concerned and they are picking up good on demand side. Housing finance is one part which we continue to believe is doing pretty well and on the rural finance it is Mahindra & Mahindra Financial Services So these are the two sides, on NBFC which are pretty strong.
With regards to license, some of them are running up on the lure of license but that is still a very political question. I do not want to speculate on that part on who is going to get license out there.