Brace for result downgrades post poor GDP nos: BNP Paribas

The earnings per share (EPS) estimates for FY14 are likely to come in lower than consensus, says Manishi Raychaudhuri of BNP Paribas.

Speaking to CNBC-TV18, Raychaudhuri says the disappointment seen in GDP numbers are a loud premonition of the slowdown to come in the Indian economy for the next couple of quarters.

Raychaudhuri says earnings of high single digit or low double digit numbers are likely now.

Speaking on the battered and bruised Indian rupee, Raychaudhuri adds that the currency is merely depreciating below its fair value as it was way too over-valued earlier.

“When the rupee was at 44/USD around mid-2011, it was overvalued almost on any parameter relative to the US dollar. At that point of time, the Central Bank should have mocked up more dollar reserves and perhaps not let the rupee appreciate to that extent. Hence, right now the rupee from its overvalued state, first corrected to the fair value and then there was an under-shooting of the rupee and that is where we are right now,” he explains.

Below is the edited transcript of Raychaudhuri’s interview to CNBC-TV18.

Q: What is your sense of these gross domestic product (GDP) numbers, is it going to set in motion a further process of earnings downgrade?

A: The GDP numbers are undoubtedly disappointing particularly when one looks at manufacturing. This predicts that there could be further slowdown going forward atleast in the next couple of quarters.

This also means that there could be further earnings downgrades. If one looks at consensus earnings estimates or Sensex EPS estimates, they are somewhere in the range of Rs 1,160-1,200 for the year fiscal 2014 and it seems fairly certain that they would have to settle atleast about 5-7 percent lower than that. This implies earnings growth of high single digits or low double digit this year.

Q: The rupee depreciation is fairly dramatic. We do look at this 8 percent depreciation in August and 16 percent year-to-date (YTD) but if you looked at it from a two-year gap from July or August 2011 to now, it is a 50 percent depreciation, 44/USD has become 67/USD at its worst, that would seminally change competitive pressures, would you say that also will bring in a certain bid of good news and if yes, are you looking at specific sectors?

A: This is a double-edged sword. When the rupee was at 44/USD around mid-2011, it was overvalued. It was overvalued almost on any parameter whichever way one calculates the fair value of the rupee relative to the US dollar.

At that point of time, the Central Bank should have mocked up more dollar reserves and perhaps not let the rupee appreciate to that extent. Anyway, the fact is that from that in its overvalued state, it first corrected to the fair value and then there was an undershooting of the rupee and that is where we are right now.

This is a double-edged sword because depreciation of the currency has some natural economic impact in terms of reducing imports by way of import substitution and also by enhancing exports even though that latter effect is relatively muted in case of India. This is because India hasn’t built up very strong competitive abilities in any of the larger export categories like many of our south-east Asian neighbours have.

Hence, to that extent, we are forced to depend on the services exports and possibly some smaller pockets like textiles or food products etc. So, there will be some positive impact no doubt of rupee appreciation but it will take some time to percolate through.

Q: I am looking at your report, you have upgraded Larsen and Toubro (L&T) and downgraded Bharat Heavy Electricals Ltd (BHEL), if you could explain the rationale behind that?

A: These two companies operate in different areas. In case of BHEL, they are stuck to one particular product segment and that is generation and to a lesser degree power transmission equipment.

Larsen and Toubro, on the other hand, has proven execution capabilities across all areas of infrastructure. Not only that, they have been able to atleast partly counter the effect of a declining order book in India by an overseas foray.

That undoubtedly puts pressure on margins because over the last couple of quarters, these overseas orders are of relatively lower margins but L&T has another advantage in this sector. This is that it has a deleveraged balance sheet, which permits it to take on more leverage on the balance sheet and therefore bid for new projects, which is an important benefit in this sector.