Auto, textiles, and sugar to do badly in Q3: ICICI Pru

Q: The first event we will step into will be earnings. How are you feeling about that part of the story? Do you think any surprises might show up in this quarter's earnings performance?

A: There isn't much of a change that you can expect in traditional sectors, which have not been doing too well like auto, textile, and sugar. These kinds of sectors will continue to do badly. At the same time, you have a scenario where the tech guidance is what people would look forward to. Barring Cognizant, which will report guidance along with their results, yearly guidance of all other Indian companies is due only in April. I think tech is a sector to watch out for in terms of how trends will shape up over the next one year.

There are a lot of treasury gains which have been made in the stock markets possibly by banks. While you might not have such good core income in terms of net interest income, treasury gains should compensate for the net interest margin compression that we are seeing in many banks in the country.

Overall, the results season would be reasonably all right. Today, the Indian markets are not just priced in for one quarter of good numbers, it is possibly priced in for one-one-and-a-half years of good numbers. Not only do we need to have good results, we need to also have encouraging views from the management on how the future would shape up.

Barring few sectors like technology, pharma, and FMCG, all the other sectors are priced for about one-one-and-a-half years of good growth. We cannot afford to have a slackening of growth. Auto may be the other sector where growth is possibly not fully discounted, if it were to happen.

The results season will not be much of a surprise. It would be reasonably in line with what we would expect. The domestic economy has been chugging along well. The kharif crop was good and there are sectors like cotton where agriculture has made good money. Another key factor that we need to watch out for, which won't have an impact in January, would be the Rabi crop. There have been all kinds of statements on the Rabi crop. If there were to be disappointments on the Rabi crop, RBI could have to cut interest rates. That would depend significantly on how the wheat and oilseed crop shapes up.

Q: From the entire commodity space, how would you approach the entire metal universe right now? What would you lean towards-ferrous or non-ferrous?

A: We believe the ferrous metal is not a traded commodity in any international exchange. So, the effect of fund involvement is much smaller.

We are seeing a situation where the Chinese have again increased taxes on the export of semi-finished steel, steel and pipes, etc. Steel is possibly in very good shape, in an environment where iron ore prices are going up and a number of Indian companies are integrated plays. We are seeing big benefits of integration.

We are not self-sufficient in coking coal and coking coal prices are expected to go up sharply, when the contracts are due for renewal. So, Indian steel companies, specifically the companies operating domestically, are in extremely good shape. The disadvantage with the non-ferrous pack is being exchange-traded, the fluctuations in the prices are very significant.

The Indian non-ferrous players are also extremely cost efficient. In many of the cost parameters, they rank almost at the top of the world. So, the Indian companies, as long as prices are reasonable, would do extremely well. But we certainly have a tilt towards ferrous in the short run and in the long run, non ferrous would also be a very good pick.  

Q: What is your sense of what might happen with foreign institutional liquidity? Is fresh money being raised or will more money be deployed in this market, over the next few months?

A: It is quite possible that fresh money will be raised. The key issue is there has been a fair amount of selling across the region over the last 45 days. The international situation is not clear at this point of time. We do know that Asia and India are possibly in a much better position than what we see in the west.

So, from that point of view, Asia would be an attractive market for the investor. Having said that, there can always be problems in the international market arising out of the subprime issue and that can delay the inflows by a quarter or so. Everyone now points to a situation where January to March next year would mark the bottom of the economic cycle in many western economies and therefore, we would look at the next quarter with a certain amount of doubt on the kind of flows that we have. But over the long run, I would say that Asia and India will continue to get good flows.       

Q: What is the market range that you would keep in mind in the near-term now?

A: That is a difficult question to answer. There is a scenario where there is a fair amount of domestic money available with investment institutions, for investing over the next quarter.

To counteract that, we have had extremely good retail interest, as seen from the derivatives market. These two are roughly matched and I would expect flat markets from an Indian point of view. If global flows are positive, for example, Indian markets have some way to go forward. At the same time, if there is any international event, we are going to see some more outflows from the global investors.

Indian markets cannot hold in because we have a scenario where we have seen a fair amount of outperformance over the last 45 days. So, the outperformance from here has to be on the back of foreign flows and not without it.         

Q: How are you feeling about earnings?

A: There is not much of a change that you can expect in the traditional sectors, which have not been doing too well, like auto, textile and sugar. These kind of sectors will continue to do badly.

At the same time, you have a scenario where the tech guidance is what people would look forward to. Barring Cognizant, which will report guidance along with their results, all the other guidance of Indian companies is due for the year only in April. So, tech is a sector to watch out for, in terms of how trends will shape up over the next one year.

There are a lot of treasury gains, which have been made in the stock market, possibly by the banks. So, while you might not have such a good core income in terms of net interest income, the treasury gains should compensate for the net interest margin compression that we are seeing in many banks in the country.

Overall, the results season would be reasonably all right. But the truth is the way the Indian markets are priced today. It is not just priced in for one quarter of good numbers; it is possibly priced in for 1-1.5 years of good numbers. So, not only do we need to have good results, we need to also have the encouraging views from the management on how future would shape up.

Barring a few sectors like tech, pharma and FMCG, all the other sectors are priced in for about 1-1.5 years of good growth. We cannot afford to have slackening of growth. Auto is the other sector where growth is possibly not fully discounted, if it were to happen.

The results season will not be much of a surprise. It would be reasonably in line with what we would expect. The domestic economy has been chugging along well. The kharif crop was good and there are sectors like cotton, where agriculture has made good money.

Another key factor, which we need to watch out for, which will not have an impact in January, would be the rabi crop. There have been all kinds of statements on the rabi crop. If there were to be disappointment on the rabi crop, the cushion that the government would have or the RBI could have to cut interest rate, would depend significantly on how the wheat and oilseed crop shapes up. 

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