Real-time Stock quotes, portfolio, LIVE TV and more.
Jul 12, 2012, 08.23 AM IST
Neelkanth Mishra, head of equity strategy (India) Credit Suisse believes the current optimism in market participants is 'unjustified'. He feels the market is likely to give up all its recent gains.
Neelkanth Mishra, head of equity strategy (India) Credit Suisse believes the current optimism in market participants is "unjustified". He feels the market is likely to give up all its recent gains.
Both indices have gained 13-14 each for the year, thanks in part to a strong June in which investors have grown more optimistic about government policy reforms to boost growth, says Mishra.
Markets are likely to take cues from industrial output and monthly inflation data and the start of the earnings season next week.
Corporate earnings results, and more importantly, the guidance given could be key in determining whether India's main stock indices can sustain their double digit gains this year. The rallies have come despite challenging fiscal and economic outlooks that have dented the rupee currency.
According to Mishra, the street is expecting 14-15% earnings growth in FY13. "We expect earnings estimates being scaled down by 4-5%," he told CNBC-TV18 in an interview.
Yesterday, consumer goods companies fell on worries about the impact low rainfalls could have on the farming sector, and hence the wider impact on consumption. Hindustan Unilever fell 0.5%, while cigarette maker ITC fell 0.44%. However, Mishra is confident that business for exporters and consumer goods companies will continue to hold up.
Infosys, the country's second-biggest software services exporter, fell 0.3% ahead of its results on Thursday, though larger rival Tata Consultancy Services, which reports on the same day, added 0.9%. Mishra expects the currency depreciation to support IT companies.
Meanwhile, Credit Suisse on Monday retracted on its unfavorable equity research report on JSW Steel last week by clarifying that the steelmaker's reported annual debt is in line with prudent accounting norms.
Clarifying his company's stance, Mishra says the attempt was to point at the rise in liabilities and mark-to-market loss at JSW. "We had no intention to say JSW is misreporting numbers," he adds.
Below is an edited transcript of Mishra’s exclusive interview on CNBC-TV18. Also watch the attached videos.
Q: Could you clarify your position on JSW Steel. What were you essentially trying to convey on their balance sheet?
A: The issues that we flagged were primarily to do with the increase in acceptances, the increase in contingent liabilities and mark-to-market on unhedged foreign currency liability. These are long standing entries on the annual report. We have been tracking this for several years. We have been interacting with the management on these for several years as well. We value steel companies on EV/EBITDA. Most of the focus is on EBITDA. On the net debt side, there is no attempt to make things comparable. What we wanted to flag was that accounts payable is accounts payable, but when its acceptance is because there is an implicit guarantee involved, this should be considered equivalent to short-term working capital financing.
From the accounting perspective, what JSW has done is absolutely correct. The auditors have approved it as well. There was no intention to allege that they are underreporting debt. What we are saying is that in terms of economic interpretation, when comparing the payables for JSW with that of say Tata Steel or Steel Authority, which we don’t have acceptances, we should be adding this back to debt. On the contingent liabilities, the receivable days of JSW are 16 this year, the receivable days for Steel Authority are 35-36. For Tata Steel in India, they are actually again very low.
When you adjust back the contingent liabilities, the number of securitized receivables for JSW goes up. This was included as contingent liabilities in the annual report. Therefore, it was important for us to flag this to investors that the receivable days are effectively higher. What the company has disclosed yesterday, which says that of the Rs 3,100 crore, about Rs 3,000 crore they actually have LCs and therefore there is no recourse to the company. This means that adding it back to the receivables is perhaps not justified. But this was not there in the annual report. The annual report still reports it has contingent liabilities as per the Accounting Standards in India.
On the mark-to-market side, this is again very common practice. I have been confused by the media furore over this. Whenever there are unhedged foreign currency liabilities and the rupee moves, we actually flag it. There are several other companies not just in this space but in other spaces as well which have unhedged foreign currency liabilities. As on that date, if the rupee is at a different value we mark-to-market and say that the debt has gone up or gone down. In this case the debt effectively goes up, because it is unhedged. There was no intention to say JSW should have valued this foreign currency liability at 54.95 as of the date we wrote the report when 31st March it was 50.88. So there was no intention to say JSW is misreporting numbers.
We didn’t change our target price. We didn't change our estimates even in the clarification. We are where we were. The attention in the media seems to have been that we have alleged some impropriety by management which is not true. We don't believe that is true. Now that we are backtracking that's again incorrect. We are where we were.
Action in JSW Steel
Jun 19 2013, 23:15
- in MARKET OUTLOOK
Jun 19 2013, 12:44
- in MARKET OUTLOOK