Feb 08, 2013, 01.23 PM | Source: CNBC-TV18

Downgraded cement to underweight, buy FMCG: Nomura

Prabhat Awasthi of Nomura Financial Advisor says the slowdown in the economy is evident from the tepid corporate results, which is why the market has not moved ahead. He expects 9-10 percent returns from Q3 earnings.

Prabhat Awasthi of Nomura Financial Advisor says the slowdown in the economy is evident from the tepid corporate results, which is why the market has not moved ahead. He expects 9-10 percent returns from Q3 earnings.

Awasthi's house is underweight on cement, and auto (barring M&M) and overweight on FMCG space.

Below is the edited transcript of his interview to CNBC-TV18

Q: After the tired looking performance of the last few weeks, what’s the run up to the budget and beyond looking like to you?

A: We have put out our strategy report in the middle of January. Our view is that one probably will see 9-10 percent returns. Presumption is that global risks will remain contained and that is again looking like very much on the cards. A lot of the rally that happened last year was due to the fact that global risk got compressed.

We expect 9-10 percent performance. Our contingence has also been that earnings will follow the economy. Economy, all said and done, is still very slow. In this season earnings have not really come up to the expectations on a broad basis and that is what market is taking cognizance of.

So, one has a big move on risk and now one is basically looking forward to earnings. Earnings are probably growing at a very tepid pace, given the slowdown in economy.

Q: What's your sense of how this global situation will play out? Is there anything in the horizon that you hear about which can turn the tap off temporarily?

A: I don't think we are expecting a massive meltdown or a risk flare up. However, there has been a stretch in some of the currencies. There could be some pull back because one has seen only one way depreciation.

There might be a cooling off, but at this point in time the fact is that the global data has improved a little. US and Chinese data has been good. There has been no further hemorrhaging in European data.

As far as global economies are concerned, there have been no red flags in the last few months or weeks. As far as central banks are concerned, they have kept the taps on. So, I don’t think one really has anything major to worry about, as far as we can tell.

Q: Do you think the current spate of issuances might become a bit of a problem or difficult for the market to bear, despite the strong global liquidity by sort of crowding out the secondary market?

A: The issue simply is that global liquidity has taken the market up to a level. One cannot argue that one will have indefinite increase in multiples just because the global liquidity is coming in.

So, the supply catches up as the market reaches certain level. If one really looks at what the government will have between the government, the private sector and the de-leveraging that is needed in certain industries. There can be a fair amount of supply that can come through this liquidity that is coming through.

There will be a lot of paper from fiscal and the de-leveraging perspective from a lot of stressed Indian corporates. So, if one has USD 25 billion coming in, then maybe USD 10-15 billion will get soaked in by the issuances. So, that always happens post a market move. There has been hardly any equity capital raised in last two years because of the situations in the capital market.

Q: How strong is the case for further PE Multiple expansion this year? From where we have reached, can you justify more multiple expansions for India during the course of this year?

A: I personally don’t think so. We have analysed this, our view is that a lot of the multiple expansions in India happened because of the global risk remaining. It is important from Indian perspective because we don’t accuse current account deficit. So, global risk tends to have a real impact on an economy through currency or through lack of liquidity.

That risk has been taken off to a large extent off the table and the markets have reacted to that. From here, it has to be, either the Indian growth picks up or the interest rates come down meaningfully. On both these fronts we are a bit circumspect because inflation is still high. There is a fair bit of current account issues still there.

Oil prices have gone to USD 117 per barrel. That will also impact current account deficit. So, these are thorny issues which cannot be resolved overnight. On the other hand, the growth itself is going to be impacted by slowdown in investment cycle. Reforms are great things from investment perspective, but it is not a switch one can put on.

Four-five years of poor series has stopped the investment cycle. Hardly, major new projects have been planned in last two-three years. So, one is basically running off the shelf of four projects which were planned in 2007 to 2009 period and maybe 2010. Slowdown is happening on that count.

Secondly, if fiscal process is contracting, we are essentially burdening the consumers more through diesel price hikes. That is in the course of railway fare hikes and electricity tariff hikes. It’s a good thing in the long term, but in the short term they are going to depress growth.

At the end of the day if the government is going to spend less on the economy, the growth is going to be negatively impacted. From growth perspective, it will be very difficult to justify a significant expansion on earnings. The expansion in earnings can happen only from the perspective that market starts to believe that this growth will pick up in two-three years time.

However, the evidence of growth will be very patchy. Data points in the economy are poor. Cement and steel demand have poor data, commercial vehicle sales have actually gotten worse in the last three months. That is to be expected as fiscal process contracts.

There will not be too much of a scope for expansion multiples. It will probably be earnings and earnings in a slow economy will grow at their pace. They are not going to accelerate without any reason. Therefore, we will probably have scope for it a 8-10 percent growth in earnings. This is what we should get in terms of market returns on nominal basis.

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