While the market has seen a rather surprising up move in the last couple of weeks, Abhay Laijawala, Head of India Research at Deutsche Equities, believes there is, unfortunately, no catalyst which suggests earnings growth expectations have improved.
On his Budget takeaways, Laijawala says the stand-out has been the Finance Minister’s ability to balance all compulsions and sticking to path of fiscal consolidation for the third consecutive time. He believes international investors as well as global rating agencies will appreciate this.
Among sectoral bets, he expects banking to do well in the run-up to credit policy. With the thrust on fiscal consolidation and no forewarning from the US Federal Reserve Wednesday on a rate increase, an interest rate cut by the RBI is firmly back on the table, he notes.
Wholesale-funded banks, select consumer discretionary and NBFCs are likely to do well, he says, adding, the house also has a contrarian view on IT and expects there is chance of a constant currency revenue growth of the sector will be back on track soon.
Below is the verbatim transcript of Abhay Laijawala’s interview with Latha Venkatesh and Anuj Singhal on CNBC-TV18.
Anuj: What are your first thoughts on the Union Budget and the market’s reaction, of course we have the global cues to deal with as well but yesterday we have had a 500 point rally in the Sensex, your thoughts?
A: The market reaction was largely attributed to I guess a relief, a relief that we did not have many of the fears, particularly the capital gains tax not coming through. In addition, there had been a lot of worry that ahead of the state elections as well as the national elections, there would be probably a lot of handouts, the possibility of subsidies -- these did not come through. There was worry that service taxes would be raised to align with the goods and services tax (GST) rates and even these did not come through. So, in that sense, ironically the market moved up because of what was not in the Budget rather than anything very specific in the Budget.
Overall, we think that the Budget was positive. Clearly, the finance minister has balanced all the compulsions very well and I think the standout has been fiscal consolidation. This is the third consecutive Budget where the government has resisted any pressure on growing the fiscal deficit. There was huge pressure and in fact after demonetisation, this year as well there was huge pressure to stretch the fisc, but we stayed on the fiscal consolidation path and I think this is something that international investors as well as the global rating agencies will be viewing very credibly.
Latha: The market has also run up a goodish bit. Is there still earnings growth that is not already in the price, if yes, where?
A: The market has moved up. We have rather seen a surprising move up in the market in the last two to three weeks and once again the market has moved up on the back of a P/E expansion. There is unfortunately no catalyst which suggests that earnings growth expectations have improved.
So, it has been a combination of domestic liquidity, to some extent foreign liquidity with the recent depreciation of the US dollar as well as some relief on global bond yields and of course domestic liquidity here in India. However, unfortunately, there is nothing to suggest an earnings recovery or any shift in that right now.
Anuj: What are your thoughts on how to build portfolio here because we have a bipolar market, IT and pharmaceutical not doing well, but banks more than compensating, consumption has started to do well again, and NBFCs are doing well. So, from here on, what will be the large sectoral bets?
A: I think clearly after the Budget and in the run up to the credit policy, we do think that the banks should be doing very well because after yesterday’s Budget, the thrust on fiscal consolidation and with no guidance from the Fed yesterday on forewarning on rate increases next month, a rate cut by the Reserve Bank of India (RBI) is firmly back on the table. So, we do think that in the run up to credit policy, banks as well as select consumer discretionaries and of course the NBFCs should be doing very well.
As far as banks are concerned, our bank analysts are very positive on the wholesale funded banks at this point in time and I think those banks should obviously be doing very well together with the NBFCs. As far as consumer discretionary goes, we think that auto companies stand to benefit impressively and clearly with consumer finance interest rates already at an eight year low, the expectation of further decline in consumer finance rates, should be buoying up the consumer discretionary stocks.
On IT, we are contrarian. We believe that the market is worried or is excessively worried over the H1B visa related issues. Now, the worries are legitimate, we concede that, but the market is absolutely paying no attention to the revenue side of the equation. The global banking and financial services sector constitutes close to 40-45 percent of the revenues of Indian IT companies and after a gap of two to three years, we are seeing the prospect of lesser regulation particularly in the United States for the banks.
In addition, the yield curve is steepening, net interest margins (NIMs) are set to return and all of this should mean that a lot of the discretionary IT spending which has been held back, will start coming back. Our IT analyst remains positive, and he believes that constant currency revenue growth for the IT companies should be moving back to 10-11 percent in FY18 relative to what we have seen last year. So, we are contrarians on IT.
The other sector we like right now and we continue to like is the oil and gas sector where we like the oil refiners and the gas companies.
Latha: Is there anything for you to increase your Sensex target further? I think you had set it at 29,000, is there now space to even it increase it further, now we are almost there?
A: We have said in our outlook that 2017 is going to be a year of uncertainties. We had also said over there that in the first quarter of the year, the markets will be volatile. So, that is our view and we believe that we really need to have a lot more certainty before we can conclude that a sustainable run in the market lies ahead of us. So, we are maintaining our target, we see no reason to believe that the uncertainties that we expect have gone away and we will have to watch how things go.