In an interview to Moneycontrol.com’s Jhini Sinha Phira, Mukesh Agarwal, President of CRISIL Research shares his outlook on Indian market. He sees equity market to be in a transitory phase in the second half.
"Whether it is the capitalisation of stressed banks in EU or policy-related actions domestically, we are yet to see concrete actions that will enhance corporate earnings," Agarwal adds.
Here is an edited transcript of his comments. Q: Suddenly everyone is bullish on Indian market though the economy remains in a stress period. Do you think something fundamental might be changing for the second half for equities? A: The current euphoria is driven by both global and domestic factors but pressures on corporate earnings continue. To re-rate equity market, we would have to see higher corporate earnings on a sustainable basis. Fundamentally, we see equity market to be in a transitory phase in the second half. Whether it is the capitalisation of stressed banks in EU or policy-related actions domestically, we are yet to see concrete actions that will enhance corporate earnings.
Meanwhile, there are challenges such as high inflation and current account deficit continue. Not to forget that we are currently operating in a high interest rate environment. Towards the end of FY13, we expect some of these challenges to subside and action on policy issues to be taken. These will then provide visibility of improvement in earnings, thereby boosting investors’ confidence on the long-term India growth story.
Q: What is your outlook on Indian market in the near-term?A: As I mentioned earlier, we don’t see a major upside in valuations, unless we get visibility of improved corporate earnings. The recent flow of positive news such as commodity cool-off provided a shot in the arm for markets. However, market still seems to be waiting for resolution on a number of macro-level issues. We may see some re-rating, if some of the macro-level policy decisions are taken quickly.
Q. Which sectors are going to drive the upmove?A: Over the next few quarters, we expect export-oriented sectors such as IT and pharma to deliver better earnings. Policy dependent sectors such as infrastructure and power can also provide uptick, if we see clarity on policy related issues.
Q: Earnings season is round the corner. Which sectors are going to underperform the broader index in the first quarter? A: Revenue growth in Q1FY13 is forecasted to drop to around 14% from 17.5% in Q1FY12, given the slowdown in economic activity and gross fixed investments. EBITDA margins are projected to decline by 100-150 bps on a YoY basis to around 19-20%, but remain flat compared to Q4 FY12. Sectors with high operating leverage such as hotel and airlines to see pressure on margins due to seasonal weakness.
Sectors such as housing, cement, construction are expected to see pressure due to factors such as input cost pressure and weak demand. On the contrary, sectors such IT, telecom, pharma and other export-oriented sector are expected to outperform due to rupee depreciation in Q1 FY13.
Q: Will exporters manage to benefit from the falling rupee? More importantly, will these companies see their toplines benefit in the coming quarter? A: The falling rupee has brought some cheer to the export-driven sectors such as IT and pharma, etc. We expect better growth in these sectors driven by better competitive position in the export market. However, margin expansion would be limited to the older contracts as the customers would be bargaining hard in the new contracts as they are fully aware of the weak currency.
Q: After the CCI punch, what is the outlook on the cement sector now?A: We expect the matter to go through a judiciary process until eventual clarity emerges. In the medium term, lower pricing power, along with prevalent cost-side pressures, could affect the industry's profitability.
Q: How should one approach the oil & gas sector? A: The sector has been hit due to subsidy issues, which have not been addressed. The cooling oil prices should provide some relief to the sector due to lower subsidy outgo.
Q: With OFS norms relaxed, is there scope for the market to expect divestment announcements? If yes, which one’s a more likely candidate to hit the primary market?A: The revised guidelines are positive and will help the companies adhere to minimum public shareholding. The guidelines have reduced the minimum offer for sale to Rs 25 crore from 10% OFS for companies below Rs 25 billion market cap. And new guidelines have given a lot of flexibility like lower time gap between two issues, lower upfront payment for institutional investors, etc. It is difficult to name companies, but there are approximately 150 companies that need to adhere to public shareholding guidelines.
Q: What have you read into the statements that have come out from the EU Summit and do you think it’s probably going to lead to a big change in terms of risk sentiment?A :The summit has eased the bailout rules, laid the foundations for a banking union and also broken the link between sovereign and banking debt through the direct recapitalization of stressed banks. These changes pave way for lesser liquidity risk. The move is certainly positive though it may not be a game changer.
Q: India's FY12 CAD has come in at an all-time high of 4.2% of GDP. Can you sum up the state of the Indian economy and the threats it faces in the days to come.A: The CAD for FY12 stands at 4.2%. The high level of CAD has been largely due to increasing commodity prices and lower export growth due to sluggish external demand environment. The CAD and dependence on capital flows has taken its toll on the exchange rate which has depreciated 22% over the past one year. Going forward, although we expect some moderation in imports (lower commodity prices) and mild pickup of exports growth, CAD is likely to remain high in FY13 at 3.6% of the GDP.
Policy action is an important trigger to revive the investment cycle and, hence, overall GDP growth of the country. In case the downside risks to growth materialize, monetary and fiscal policy has very limited ability to revive the economy as deficits and inflation remain high. A normal monsoon is critical to cushion growth and keep the inflation from spiraling further.
