Need fiscal, monetary stimulus: Motilal Oswal Fin

Q: What are you working with for earnings next year? We have heard a couple of dismal reports which indicates flat for the first half and then actually negative growth. Have you come around to that view as well or not quite yet?

A: Our estimate for the second half of the current year is roughly around 3% growth. That's the half with which one can predict with lot more visibility right now. Next year there are so many moving parts that to put a fix to the numbers is going to be very difficult and I fear that we are going to change the numbers quite a bit over the next six months because the kind of environment we are in. If one just tries to model in the environment that we have lived in for the last two months, the picture doesn't look good at all.

This quarter, next quarter we have seen massive reduction in commodity prices, production cuts, inventory losses, interest costs going up some of these things while they may not be the right variable to model in for next year. But the pain that we have seen starting October will well run into next year also.

If one looks at our numbers then the two new businesses that Reliance is suppose to commission in the Q4 which is gas and the refinery, if one were not to model that then we are expecting a 5% growth in earnings for next year. But as I mentioned that there are so many variables and they are changing on a monthly basis right now. Let's focus upon what the second half number is going to look like.         

Q: One point that you touched upon Reliance because a very large part of the earnings growth of the index next year could come from Reliance's new business. What do you think the reality for that will be given how commodity prices, refining margins, etc. have moved? Do you think you need to scale down estimates for Reliance for FY2010?

A: I guess so because if one looks at our current estimates, we are modelling in a strong growth because we are taking the commissioning of both the new projects in the Q4, and currently, our GRMs for next year still averages out at more than 10. I guess this quarter and the next quarter while one may see margins lower than the first half; we will have to see how much of adjustment it will be on account of inventory and what are the regular business margins.

So, given the way the Singapore margins are trading right now which is USD 1-2; if one were to model the same then next year numbers will get moderated. 

The petchem cycle will also result in some more downgrade because first we are seeing a moderation in the margin and also seeing some volume cut across the globe. So right now in all the commodities the lower volumes along with lower prices both are going to result into lower earnings.   

Q: What about the whole banking space? With specific reference with the kind of NPA (Non Performing Asset) problem they may have. We have heard a lot about ICICI Bank but now there are concerns about how State Bank of India as well might be close in that list of on a large looming NPA problem?

A: It's the same problem of the environment again. In the last two months businesses have taken such a big knock that people have started doubting almost every corporate that they have been lending to that they have been in some kind of a stress. But there will be some segments which will have higher NPA and there will be large segments which would still be able to scrape through.

Overall the loan book profile of the Indian banks is well diversified compared to what it has historically been. Secondly, the kind of gains that banks like SBI are going to make on their bond portfolio will still provide them a lot of cushion to make higher provisioning. So while we definitely expect lot more addition to the NPA over the next four quarters, the impact on the P&L (Profit & Loss) account will not be as severe as what it is feared to be right now.     

Q: Not just these big banks even the ones which were perceived to be the top end private sector bank like HDFC Bank, Axis Bank, etc. have also been hit quite badly in terms of stock price. Do you think the market is right in sensing these fears or is it been overdone?

A: Probably, we will come to know over the next few quarters whether or not the markets were right. But I guess one of the reasons which are leading to the fall in these prices is the foreign ownership in each of these banks is very high--HDFC Bank it is over 40%, in Axis Bank also it's quite high. This whole of the calendar year, including the last few weeks, we have seen very heavy dosages of FII (Foreign Institutional Investor) selling happening in the frontline stocks, and maybe, right now we are in a market where they are basically selling some of the stocks which they are still able to sell it in reasonable volumes. Stocks such as HDFC, Bharti and Reliance feature as the top stocks in that list. So, one has seen almost 20% correction in HDFC Bank itself in the last two weeks. Nothing has changed on the business for them but just that the selling has been so severe that it has resulted in this fall.

Q: When you say there are more revisions likely in the next six months, it would be a reasonable assumption to make that they would probably be on the downside and even that 3% growth for the second half might be up to question?

A: As far as commodity and metals are concerned, we have moderated our volumes and prices reasonably well. The surprises that one can see can come on the non-commodity side. Till the recent time when we kept on meeting the companies they are still guiding well although there are some problems there but they are still guiding for this half.

But the December quarter will be the best quarter to assess how the full year numbers will be and what kind of numbers one should build in for next year. But I would agree with that the next revision also that you will see that we will be making sometime in January would be on the downside only.      

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It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed.