Jan 11, 2017 03:38 PM IST | Source: CNBC-TV18

Demonetisation may postpone earnings recovery to FY18: UTI MF

Due to the cash crunch the recovery in earnings is likely to get postponed to FY18 and uncertainty is likely to cloud the domestic potential in the near term, says Swati Kulkarni, Executive Vice President and Fund Manager of UTI MF.

Due to the cash crunch the recovery in earnings is likely to get postponed to FY18 and uncertainty is likely to cloud the domestic potential in the near term, says Swati Kulkarni, Executive Vice President and Fund Manager of UTI MF.

In an interview with CNBC-TV18 she said that global cues are impacting the market. Market has started shifting from growth to a value in the last 3 months and demonetisation has accentuated this shift, she said.

She further said that there may be some earnings downgrade post the third and fourth quarter earnings announcement.

Below is the verbatim transcript of Swati Kulkarni’s interview to Prashant Nair & Surabhi Upadhyay.

Surabhi: Your broad thoughts on the market. It has been quiet a right since November 8th. How do you view things at the moment?

A: The recovery which we were beginning to see is postponed now to maybe FY18 and there is a bit of uncertainty as far as our own domestic potential is concerned in the very near-term. Market along with that the developments happening on the global front are having impact on the market and I think that is what the mood is reflected on the street.

Surabhi: In terms of the allocation and the sectoral picks, have you started making any changes because of demonetisation and of course because of global events, the strength in the dollar and the outperformance we are beginning to see in some IT stocks. What is the overall sense right now?

A: That was an immediate trade I would say that market per se started shifting from growth to value in last three months and demonetisation has in a way accentuated that shift. Earlier the portfolios were too much oriented towards domestic cyclical recovery and IT was more of a neutral stance that I was running and that is getting moderated and we have gone slightly overweight on IT because there we see value in the near-term in terms of probably the growth is not at all what market was factoring in and situations might improve if the promises that Donald Trump has made in terms of getting back the focus on the corporate growth there. That could ease out some of the discretionary embargos that companies might have and that is why probably the topline will start looking much better than what it is.

The other thing is of course the rupee will sort of support any kind of visa related cost escalation and the valuations at 15 times for largecap companies are really attractive and hence that thesis is being played out now.

Prashant: I understand the market is down 1,000 points or so, on the Nifty, but stock prices move up when earnings expectations are raised. By all accounts earnings expectations have to be brought down, we have barely seen that move down. In some cases we have but not on an aggregate basis. At some level do you think we are in a 2010 to about mid 2012 kind of a phase where stock prices had corrected but still elevated but you could see that the business momentum had slowed down and even was actually turning down pretty fast. So, even though stocks maybe down in an absolute terms they might be more downside. What do you make of it?

A: I agree with you fully as far as the downward revisions are concerned, so given the last couple of quarters results improvements that we had seen, the downward revisions to earnings estimate had come down to about 1-1.50 percent or so- that in the next two quarters, analyst will grapple to find out where the earnings shift is happening because it is very difficult to gauge the impact in the near-term because you have some anecdotal evidences but as companies reflect that in numbers there will be definitely some downward revision to the FY17 numbers for sure.

Hopefully, we think that from January onwards you will see impact of this cash crunch subsiding and hence you could have a much lower revision to the FY18 numbers.

As you rightly pointed out the market seems to be a not yet factoring in the earnings growth downside that may have in the near term, but having said that there are periods when market price to earnings (PE) have remained little elevated because there is no structural destruction of India demand story. It is just a temporary thing and market would allow some more time rather than the multiple corrections given the fact that structurally this doesn’t damage India view.

Prashant: By that logic then not very much will destroy the India demand story and that is true when you got a billion plus people and they will consume, so that story is there and that will remain?

A: Yes and plus interest rate cycle would be in favour as you move along. So, there are drivers which will keep up India growth story intact over a longer period of time.

Prashant: In a lot of casesm I am just using Jubilant as an example; we say Jubilant trades at Rs 40-50 depending on whatever earnings estimates you have, but those elevated PEs the logic behind paying those PE multiples is the argument that the numbers and the margins that those companies are operating at this point of time are not normalised, they can’t operate at this 8-10 percent margins. They will grow over a period of time. Given the state of events and how things look because business momentum has been broken do you think there is still room for PE compression - that is the point I was making?

A: I would like to address this question in two parts in the sense there are some of the companies where earnings growth in terms of estimate was very high and probably the PE rating, one was justifying the other, like if you are giving the higher PE definitely the expectation of growth was much higher and because the expectation of growth was higher you were sustaining those high PEs.

If you dissect the market movement in last three months there is a clear preference towards the value that the investors are giving and hence you will see that these high PE multiple stocks have underperformed in last three months or so. I think you will have to be stock specific and also the areas which are less affected because of this cash crunch should stand out as the valuations are concerned. It is going to be little stock specific but I take your point as far as some of the highly valued companies are concerned.

Surabhi: Do non banking financial companies (NBFCs) stocks still find a place in your funds or has there been any re-think after what we have seen from the November 8th?

A: The NBFCs also would have tough time in the near term growth is concerned. However, their efforts are now focused on the recovery front and that will help in strengthening their balance sheets and numbers. There has been a bit of harsh treatment that the market has given on the NBFC as a sector.

I think at least in the medium-term the market segments that NBFCs address banks may not be comfortable in penetrating into these sectors in the medium-term, so I have a feeling that when it comes back to a normalised growth because on the capex front we still don’t see the growth can come let us say in next one year or so. So, where are the growth opportunities as far as credit is concerned? Hence I think the NBFCs will eventually get on to that on ground liquidity improvement which is largely into the smaller areas and the agriculture led areas.

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