Nandan Chakraborty, MD - Institutional Equity Research - Axis Capital expects the Q1 earnings for FY14 to disappoint due to weak global cues, clueless election outcome next year, weak industrial output numbers and poor auto sales numbers. He believes the Q1 earnings for FMCG, consumer discretionary and autos will be weak.
Speaking to CNBC-TV18 on the earnings season, he says in the quarter gone by, there could be disappointments in metals, in commercial vehicles, in cars, in consumption.
"At this point, we are overweight on the private sector oil and gas companies, the pharma companies still, IT and we will move more and more into consumer discretionary as the months move on. We are underweight in metals, telecom, cement and banking," he adds.
Meanwhile, Chakraborty rules out the possibility of a rate cut until rupee stabilises. He expects rupee to end at 60/USD in 2013 and at 62/USD in 2014.
Below is the verbatim transcript of Nandan Chakraborty's interview on CNBC-TV18
Q: We are entering in another lackluster earnings quarter. Do you think people will have to wait longer than one thought earlier for some serious gains from equities?
A: The market has been quite schizophrenic and will remain so for sometime until we sort out what happens to quantitative easing (QE) on the global front and what happens to the elections on local front. The reason for this schizophrenia is what is good news and what is bad news per se. If you look at it, many of the sectors, the earnings, the trough of the earnings was the last quarter. In the second half, there could be some improvement in things like consumer discretionary and so on.
We keep hoping that QE tapering off does not happen but it is exactly the opposite because this is a difficult time. If the QE continues for sometime, it will help a lot of countries including India but in the long run, it means that the US growth is down.
You don’t get more money of the equity market per se versus the bond market per se and the US remains weak. So you need money to move from bonds to equities in the first place. Once that happens, the world grows, China grows, India grows, Europe grows and everybody is happy. So, the definition of good and bad news is getting confused these days and I think it will get incrementally better. Whether that actually translates into something structural will depend on what happens to the US growth abroad and in India what happens to the elections which are both some time away. So, in the near term, in the second half we will have a massive consumption driven by a number of factors.
One, the monsoons so far is quite good. Second, we are still hoping that the interest rate cuts will start if not in July-August, maybe sometime later because till the rupee stabilises, you are not going to have interest rates cut. Third, the huge spend that we are expecting from the government as well as the pre poll spends. However, this consumption spend that you will see in the second half is going to be of pretty low quality because these are stimulus based, they are not really structural.
We still need the elections to come in, the new government take over, capex to start and all that before there is a structural movement in terms of consumption. Similarly, you will have schizophrenia in earnings also because if you see, some of these companies that are overstretched, when I say consumption is going to be great in the second half, it is largely going to be the higher end of FMCG and the consumer discretionary space. So, one has to then see how much are valuations factoring in. So, this earnings season, the quarter that’s gone by, there could be disappointments in metals, in commercial vehicles, in cars, in consumption.
We just did this dipstick survey all over the country and on the consumption space at least, it seems to be pretty bad both on FMCG as well as consumer discretionary and autos. Things haven’t revived at all, then FMCG and power. So, you will still see the earnings being bad but this is all the previous quarter. In the coming quarter, maybe things will be better.
On the other hand, according to our survey, rural India is doing much better than urban India. Pharmaceutical continues to do well. Telecom and media are doing better than other sectors, however, these don’t stack up necessarily to the companies because the companies have their own issues and valuations.
At this point, we are overweight on the private sector’ oil and gas companies, the pharma companies still, IT and we will move more and more into consumer discretionary as the months move on. We are underweight in metals, telecom, cement and banking. Then there could be some trading calls, things like metals, PSU Banks and OMCs have all reached levels that are very cheap but these are trading calls, these are not structural at all.
Q: The only thing that’s been a little more manic than the equity market is the currency market. What have you made of the way the rupee has moved? What kind of flow through ramifications does it have for equities in the months ahead?
A: Firstly, the weakness of the rupee is partly due to do the strength of the dollar but that does not condone how we have been functioning. The dollar has been strong, we have not been able to finance our current account deficit as much as we would like to. At least, this year remains worrisome.
Everything will get better on a year-on-year (YoY) basis whether it is the fiscal deficit or the current account deficit (CAD). As a country, we are pretty vulnerable to finance our CAD and that’s where the real problem is.
We had forecasted a depreciating rupee in early March and had tracked that into numbers and pharma, IT have benefited from it which are related to the US growth. But rather than the depreciation of the rupee because the depreciation of the rupee doesn’t affect these as much as the US growth and we hope those two sectors will continue to do well. This is because metal is extremely complicated and there are other issues like the new laws to do with warehousing, for aluminium. These are some of the other final points that may keep metals a bit variable.
Also, in China there is a lot of local government subsidy to keep the factories of metals running and therefore, you will have problems there. We have a forecast of Rs 60 average for this financial year and Rs 62 for the next year but we will have to revise these upward or downward, it is very difficult to say over six months.
Q: The problem is not so much with the Nifty that is still not doing too badly, it is with the broader market. Do you expect this extreme focus on quality or the narrowness of this market to persist till the elections?
A: There will be a change in things like rural, things like consumer discretionary, they will take an uptake in the second half of this year and so, there will be a move.
Again, where will you move post elections when we move into things like capex. So, whether you take L&T or whether you take cement whichever way you move, that portfolio will have to change so it is almost like every six months you have to make a change in the portfolio based on these. This is because in the second half, the consumer discretionary spend is of low quality because it is stimulus based.
As far as midcaps are concerned, generally they go up in one of two situations. One, when the markets are strong, economy is strong and the largecaps have already moved up which is not the case now because the economy is not strong. Secondly, when there is a massive GDP surprise which we don’t foresee right now but you never know.
Thirdly, when there is a short term movement in the smaller caps the discount is too much. That’s not forecast able but some of the trading calls like metals, PSU banks and oil marketing companies which are trading calls. You get a very small trade simply because they come at cheap prices. Similarly, you might have a trading call in smallcaps at any time simply because they are so cheap but that is not a structural call yet.
Q: What kind of trajectory are you penciling in with regards to interest rates? Have you begun to factor in the possibility that rates may actually start moving higher sooner than people expected?
A: Actually no, we had a lot of debate with our economist recently. It is unlikely that there would be an interest rate hike. This is because the rupee or the currency is the most forward of all parameters in an economy. Due to position built up, it gets into speculative mode and so it overreacts and over corrects.
Right now we are hoping that the rupee settles back into some zone. While structurally there is a possibility that it still could go up to 63 because our average for the year is 60 and Q1 was lower therefore, we may end up the year at a higher figure than this. Next year, we are at 62 for the year as an average.
There are dangers to the rupee but for present, the Reserve Bank of India (RBI) will wait for an opportunity for the rupee to stabilise before any interest rate cuts. Interest rate hikes I don't think RBI would do at this stage of the economy, it doesn’t make sense.
Q: Do you fear that this whole fad of emerging market investing might be on the way in the next three-four years and you will have to increasingly work harder to convince people to put money into emerging markets?
A: It is possible but not necessarily for India. The rest of the emerging markets are fairly different from India. The consumer markets are not usually known as Brazil, Russia, India, China and South Africa (BRICS) market. India is really India and to an extent China because China has also a lot of capex but India is actually the most consumer oriented of the four BRIC countries and the other smaller countries are not that investable relatively. So, it will get more and more difficult but it all depends on what we do with two things.
One, if the US growth becomes stronger and the QE is indeed tapered off, US is going to drive the world economy which is good for us. Therefore, huge amount of money that’s lying in the US bonds will start moving into US equities and therefore, the equity pie will grow.
Two, Japan will continue to keep interest rates slow and the US has already said that interest rates will continue to be low. So you don’t have an issue of interest rates going up anytime in the near future. You have strong US growth, Japan and low interest rates. If you have a good government, which means India is okay, the rest of the world may not be as benefit it as India because obviously these are more commodity related and capex related.