Earnings growth to come under pressure: Emkay

While the market is expecting about 13% earnings growth for this year, Damania feels it will more tend towards 0-5% by the time the year ends.

Below is the edited transcript of Damania's interview with CNBC-TV18. Also watch the accompanying video.

Q: Give us a sense in terms of how exactly do you think the markets have reacted to the EU summit and what triggers are we hoping to react to going forward?

A: This rally was clearly led by a global phenomenon and nothing to do with the local markets. Obviously, there was some optimism when the PM took over the FM’s portfolio but apart from that there was nothing which was positive about the economy.

As we progress towards the end of this month i.e. July, we will start seeing the results coming in. I think rupee has proved to be very volatile during this quarter and the full impact of that has not yet been felt in the markets and in the corporate earnings so far. So we will see part of that come through.

We are also seeing signs of slowdown spreading across to the rural areas as well and part of that impact also could be felt through as we go forward. This month’s auto numbers are telling you the times to come as most of the auto numbers have been weak from the two-wheeler side.

However, it does not mean that the slowdown has not spread itself deeper into the rural areas as well. So what we feel is that earnings growth trajectory is going to come under pressure; the market as such is still expecting about 13% earnings growth for this year. We would say that it will more tend towards 0-5% by the time we end the year.

Q: If we can go bottom up with the auto numbers itself after looking at the June numbers, are you able to perhaps cut your earnings growth even further for this sector; any favourites in this space? 

A: In case of auto numbers, we have been expecting that the slowdown will spread across the rural areas as well. So to some extent, we were positioned but I would say that as time progresses, analysts tend to be more conservative. So we will see more cut in earnings forecast as we go forward especially for the two wheelers and probably even for M&M. 

Q: It seems like the broader markets had a lot of fervor as compared to the frontline indices even in today’s trade. Even last week, there was an incremental or basically the midcap index is up around 3.6% - 3.7% as compared to the 2.5% - 2.7% gain that we saw in the Nifty. Give us a sense in terms of what sort of strategy you would implement in terms of the broader markets, would it be more stock specific and is there more interest now coming in with regards to the broader markets?

A: As a strategy, we have never been more market specific, we have always been stock specific over the last several quarters because that is where we try to find out outperformance. Rather than saying it is midcap or largecap, we go by the attributes; and attributes basically in this case are where will there be earnings growth, free cash flow, quality of earnings and where the negative surprise will be much lower.

I think those are the kind of questions we ask ourselves rather than classifying them into midcap or a largecap category. So far, answers to those questions have proved to be more convincing in terms of getting a recommendation through than the broader market direction.  

Q: Will you wait for lower levels to buy the market itself?

A: If I was an equities-only player and if I had to invest only in equities then what I would say is that we are now tending towards buying into the power sector, pharmaceutical space and technology space continue to be overweight in pharmaceutical and technology. Now, we have added the power sector to our buy list.