The fourth quarter of FY12 saw the weakest GDP growth in almost nine years. It slipped 5.3% in Q4 and has suddenly, thrown light on the sorry state of the Indian economy. During the Citi Conference, Aditya Narain, Managing Director and Strategist at Citi India gives his outlook on how things look like in India.
Narain futher said that earnings growth is more gradual than lumpy and therefore, they are eyeing an earnings figure of 10 to 11% in FY13.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: Bang in the middle of the conference we got that GDP shock. How did that go down with participants and what was the mood like?
A: I think from a number perspective, it did surprise negatively. I don’t think anyone was really expecting that number to be as weak as it was. This was in some measure because bottom-up the sense one has got from companies was that February-March had tended to be reasonably decent.
I think the number really surprised. In terms of its impact on the market, it was relatively muted because I guess in part, the market had been expecting a negative surprise of some sort or the other in any case.
Q: What does it do to your forecast? Your economist has scaled down her GDP target, but what impact will it have on earnings growth that you are projecting for FY13?
A: At this point in time our earnings projection is about 10-11% for FY13. Earnings are more gradual than lumpy as GDP data, which comes out once a quarter. In some senses, I think some of it would have got factored in any case. There could be some risk to this.
But I think you also got to look at the slight disconnect that you often see between GDP growth and earnings growth. Illustratively if you look at what’s happening in the developed markets at this point in time, earnings growth continues to be actually very robust. If you see the difference between GDP growths of emerging markets and the developed markets, it is very, very vast.
If you see the difference between earnings growth in developed markets and emerging markets, it’s actually very, very miniscule. In some senses, it need not necessarily have such a direct implication from earnings. The other part also is that for earnings, we look at the top end of the market however you split it. Whereas slower GDP growth implications are actually much more broad based.
Q: In that sense are you saying that the broader market might see more pain even if it’s not reflected in the Sensex earnings?
A: Very structurally, yes.
Q: What about consumption? A lot of economists pointed out that consumption might be slowing down now, shored up in some of the services data. Could those earnings be at risk?
A: Our view on the market and on earnings has been that the investment side, the capex side is already shown in the numbers and in market sentiments. It is on the consumption side where the numbers have continued to be good and just to support those numbers you have had valuations that have also tended to be very good.
If there is a meaningful risk that lies in the system, it potentially lies on the consumption side. That being said, consumption isn’t that binary. If there is an impact, a 10% top-line will become an 8% top-line rather than 10% top-line becoming a 2%.
Q: So not the infrastructure kind of swings in earnings?
A: Yes, it's not an institutional order flow kind of business. It is like you eat out less once a week or something like that.
Q: This ties in with the theory that you have been talking about it in times of great currency volatility or depreciation. It's actually the domestic consumer plays which do the best. Could this time be different then?
A: In some senses I think it's played out because you have had a massive currency drop off. On top of that, you had problems on the capex and investment cycle side. So you have had both, from consumption being less impacted to the market seeking safety on the consumption side. I would tend to believe the best has actually played out for that space, apart from currency reasons that just adds to this entire argument.
Q: Incrementally, the case for hiding in consumer defensives is very, very difficult?
A: Not for us. We have been propounding that view for the last couple of months. It's worked in part, it’s not worked fully. But, our sense is that there is very little downside risk on the capex side because most of that seems to be factored in or you are left with this upside risk.
Whereas on the consumption side, there is no possibility of an upside risk between valuations and the growth has been so significant. But, then you are really left with downside risks. I wouldn’t hide there.
Q: What does it mean for financials because that's the big call now? Given that the GDP number is ugly and you might go through some more economic pain, do you need to rethink what kind of asset quality worsening we could be staring at?
A: I think we clearly have to look at it. Our view on asset quality really has been that the worst incremental deterioration is done. You will continue to see deterioration for the next two quarters but the pace will tend to ease off. This number does to some extent threaten that hypothesis a little bit i.e. the pain could potentially continue a little bit further.
But between the likelihood, the rates will potentially fall a little bit more than what was expected. Our sense is the market is discounting a lot of risk. We wouldn’t tend to be so cautious. The number itself does one no good because you have to really look at it a little more closely.
But you also potentially got to be a little careful with this number. You have had plenty of occasions when GDP numbers have been revised down. With this number, you are running a little bit of a risk of that number being revised up a little bit. It just seems too extreme, given what one was hearing bottom up.
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