Axis Capital's Nandan Chakraborty sees disappointment for the first quarter earnings of FY14. he, however believe things are likely to be better in the quarters ahead.
Nandan Chakraborty, MD - Institutional Equity Research - Axis Capital expects the Q1 earnings for FY14 to disappoint due to weak global cues, clueless election outcome next year, weak industrial output numbers and poor auto sales numbers . He believes the Q1 earnings for FMCG, consumer discretionary and autos will be weak.
Meanwhile, Chakraborty rules out the possibility of a rate cut until rupee stabilises. He expects rupee to end at 60/USD in 2013 and at 62/USD in 2014.
Q: We are entering in another lackluster earnings quarter. Do you think people will have to wait longer than one thought earlier for some serious gains from equities?
A: The market has been quite schizophrenic and will remain so for sometime until we sort out what happens to quantitative easing (QE) on the global front and what happens to the elections on local front. The reason for this schizophrenia is what is good news and what is bad news per se. If you look at it, many of the sectors, the earnings, the trough of the earnings was the last quarter. In the second half, there could be some improvement in things like consumer discretionary and so on.
We keep hoping that QE tapering off does not happen but it is exactly the opposite because this is a difficult time. If the QE continues for sometime, it will help a lot of countries including India but in the long run, it means that the US growth is down.
You don’t get more money of the equity market per se versus the bond market per se and the US remains weak. So you need money to move from bonds to equities in the first place. Once that happens, the world grows, China grows, India grows, Europe grows and everybody is happy. So, the definition of good and bad news is getting confused these days and I think it will get incrementally better. Whether that actually translates into something structural will depend on what happens to the US growth abroad and in India what happens to the elections which are both some time away. So, in the near term, in the second half we will have a massive consumption driven by a number of factors.
One, the monsoons so far is quite good. Second, we are still hoping that the interest rate cuts will start if not in July-August, maybe sometime later because till the rupee stabilises, you are not going to have interest rates cut. Third, the huge spend that we are expecting from the government as well as the pre poll spends. However, this consumption spend that you will see in the second half is going to be of pretty low quality because these are stimulus based, they are not really structural.
We still need the elections to come in, the new government take over, capex to start and all that before there is a structural movement in terms of consumption. Similarly, you will have schizophrenia in earnings also because if you see, some of these companies that are overstretched, when I say consumption is going to be great in the second half, it is largely going to be the higher end of FMCG and the consumer discretionary space. So, one has to then see how much are valuations factoring in. So, this earnings season, the quarter that’s gone by, there could be disappointments in metals, in commercial vehicles, in cars, in consumption.
We just did this dipstick survey all over the country and on the consumption space at least, it seems to be pretty bad both on FMCG as well as consumer discretionary and autos. Things haven’t revived at all, then FMCG and power. So, you will still see the earnings being bad but this is all the previous quarter. In the coming quarter, maybe things will be better.
On the other hand, according to our survey, rural India is doing much better than urban India. Pharmaceutical continues to do well. Telecom and media are doing better than other sectors, however, these don’t stack up necessarily to the companies because the companies have their own issues and valuations.
At this point, we are overweight on the private sector’ oil and gas companies, the pharma companies still, IT and we will move more and more into consumer discretionary as the months move on. We are underweight in metals, telecom, cement and banking. Then there could be some trading calls, things like metals, PSU Banks and OMCs have all reached levels that are very cheap but these are trading calls, these are not structural at all.
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