Jitendra Sriram, MD & Head of Research, HSBC India expects markets to remain volatile due to global events. However, he says, the pace of EPS cuts for Indian corporate is slowing down.
According to a report, India Inc reported net profits up by mere 2.7% year-on-year mainly due to a good showing by banking, cement, IT, pharmaceutical and fast-moving consumer goods companies. Had it not been for these sectors, profits would have actually plunged by as much as 9.6% for the March quarter.
Sriram says the market may be forming a base for corporate earnings in India. According to him, valuations look attractive and the markets might rally once the globe stabilises. "From a longer-term investor perspective, these are clearly opportune moments to enter and get into the market," he says.
He expects inflows to resume once the rupee stabilises.
Below is an edited transcript of Sriram's interview on CNBC-TV18. Also watch the attached videos.
Q: Do you think the market will respond to the petrol price hike or wait to see what the government is able to do on diesel tomorrow?
A: I think what has genuinely surprised people is the quantum. The fact that they have made a hike probably was long overdue. I don’t think the market would have been too excited just with the hike but Rs 7 is quite a stiff one. So if it carries through, I think it is definitely going to rub off positively on sentiment.
The second issue of course is that if they have taken equally bold step on diesel, clearly it will rub off positively on sentiment and the fact that at least the government seems to be coming out of its phase of inactivity or something and doing some positive steps to bolster the economy.
Q: What is your sense of the market between the fuel price hikes and what is going on in the world, in Europe, etc? Do you think we are in for some more volatility through the next few weeks or you see a base around 4,800?
A: In terms of global factors, clearly, the markets will remain volatile because it is pretty much binary events. So it is very difficult to take a call either side. One day you have news that Greece is going to go out of the euro, another day that it is going to be within the euro and so on. So it is very difficult to take a call on that but I think if I look at the Indian markets, one thing is clear that the pace of EPS cuts is slowing down.
If you were to take a look at each of the earlier quarters that came by -- June, September and then December -- the point was that after each result the numbers were cut for corporate earnings quite substantially. Fourth quarter has been much more in line with expectations. The kind of tone down that we have seen in earnings clearly seems to suggest that we are in a bottoming out phase in terms of the pace of cuts and so on. So I suspect that it could very well be an inflection where probably over the next one or two quarters you could start looking to see whether you are now slowly entering in upgrade phase or whatever.
Second issue is also from a valuation perspective, which clearly shows that there is hardly any froth in the market. We are now trading at sub-13 times one year earnings given that we are expecting somewhere in the region of Rs 1,235-1,240 for the Sensex next year.
So in that regard I think markets are definitely looking -- one should be constructive -- I agree that you could have one or two knocks or body blows given the Greece situation or the situation emerging in Europe. But the fact is that from a longer-term investor perspective, these are clearly opportune moments to enter and get into the market.
Q: The problem has been the rupee at 56. How are global investors aligning themselves with that because flows have dried up quite completely?
A: That is definitely something, which always happens when you are seeing the phase of grinding down. The fact that we have constantly drifted down from 53-52 where we were holding for sometime and down now to 55-56, the point is, during such phases money never comes. So the point is once it stabilizes, then we see some kind of holding certain level to the dollar is when money will start coming back. Clearly, from a longer-term perspective, it was something which was needed.
We are running a huge net import bill. If imports become more expensive, automatically the demand-supply imbalances tend to get rectified. Our imports will likely come down, export oriented sectors will become more competitive and naturally forming a self correcting feedback loop into the net trade number that we have. So from that aspect, clearly you should start seeing the numbers starting to improve given that the rupee has come down to where Indian corporate can be more competitive in the global market place.
Q: How would you approach this set of companies now — the auto companies Maruti etc, which are clearly complaining about this complete move towards diesel trends and also the upstream and downstream oil companies?
A: Upstream and downstream, I don’t think petrol per se has too much of an impact on the upstream as you are never part of the subsidy sharing mechanism as such on petrol. So I don’t think there is going to be any impact apart from the fact that in case market perceives and I think it is a very logical conclusion that you could see a follow-through action on diesel, you could see the impact of it felt on the upstream side.
For downstream, what has happened yesterday and the likelihood of a diesel price increase coming through in the near-term post the EGoM meet is something which will be taken positively for the sector. Autos are going to feel a little bit pain because normally immediately following a hike and that too a pretty steep hike in this case this time around you will see some slower numbers at least in the near-term for the next couple of months, you will see some slower numbers.
Second is also that lot of the auto companies have good import dependency for critical components on their parent and given the weakness in the currency that is also going to show through in terms of a weaker margin in the near-term at least for first or second quarter numbers. The combination of both these factors is going to play adversely on sentiments towards auto names.