Q: A lot of people in the market have started talking about an earnings recovery already. They aren't buying that earnings will fall 10% this year. Some people have started talking about 10% earnings growth for the index this year. Do you think the market is sensing some recovery and has it got it right in your eyes?

A: If you are asking for the market in aggregate, most people have 850-860 type of number for the index. But if you disaggregate that, there is a big chunk of earnings accretion which is coming because of Reliance Industries, Tata Steel. Ex-Tata Steel, maybe the index is already going to make Rs 920-930 this year. If we are saying FY10, which is a really difficult year, Indian markets are growing in excess of 10%. It is not an unreasonable bet to say that next year you could potentially grow in excess of 15% and maybe closer to 20%.

Q: You are talking of fiscal year 2011?

A: FY10. Ex-Tata Steel we are probably at Rs 925 in terms of earnings. Then again because of the way our weights and free floats are, all that kind of erodes a lot of the earnings of RIL in the current year. The following year, which is FY11, on a base of Rs 925, it’s not hard to make a case of close to Rs 1,100 earnings which means the index at 14,500 is not that expensive.

What’s the composition of these earnings, are they more commodity or volatile type earnings? That’s what determines where you are going. Again it’s a matter of personal belief. Do you think that commodities or resources are volatile or are they the longer-term trade and that’s how markets eventually will get re-rated.

If I look at the big chunk of earnings growth, RIL is earnings accretive because of what’s happening on the gas front. It is not that people are very bullish on what will happen to gross refining margins or to petchem margins. Given the global backdrop, it’s very unlikely that the highs of the first three months will hold when people had presumably shut down plants all over the world. Therefore, we got a spike up over there as well. Maybe it gets a bit weaker in the second half.

Similarly, if you look at companies like Sterlite, a lot of the incremental earnings come because of the power capacity which they have created rather than because of the big recovery in metal volumes or demand. If this continues playing out in this manner, it is actually playing back into the theme that what we are consuming is resources, energy, or power and utilities which are big ticket items which we can’t stop consumption of. That indeed is the next big trade. Whatever we are going to consume has to remain bullish. As long as you have the right businessman who can take that opportunity, these companies are going to multiply manifold from here.

Q: So, you are not seeing any major recovery in earnings for the non-commodity basket in the next four quarters?

A: Let’s disaggregate. It’s maybe easy to think in terms of index constituents. The commodity end is oil and gas, metals, and cements. So, oil and gas and metals are clearly a play on what’s happening to the globe. If you go down a level from that, unless these utilise their capacities to very large extents, it is very unlikely that you are going to see a lot of order book flowing onto the capital goods side.

Unless these people are making significant amounts of money, you aren't likely to see very large credit growth in the banking system, especially now that banks are not that keen to lend to retail in the unbridled manner which they were doing in the past. If you add up all this, it optically looks like a 35% commodity weight, but then you add at least 10-20-25% for the capital goods and banking which is also linked to it and that is half the index in a sense linked to what happens to commodities. It is consistent with the trade that when people come to emerging markets, the CRB Commodity Index in emerging markets move in the same line and is not inconsistent with what happens to Brazil and Russia as well. If I take the other end of the markets, telecoms, utilities, fast moving consumer goods, pharma are nice and stable.

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