Earnings consolidation to persist for 2-3 years: R Sukumar

In his view, those who are worried about momentum, by and large, are out of the market while those who are in the market are looking at the value presented by various stocks. Therefore, Sukumar does not expect any big panic selling unless the policy environment deteriorates significantly compared to where it is now.

In fact, Sukumar is hopeful of some improvement in the policy making process while he does not expect significant monetary easing in the near term.

According to him, the corporate sector will witness consolidation for at least 2-3 years. “Consolidation will not be a one year process, probably, it will be two-three year process. During that process, some companies will improve their margins, earnings, growth rates and market share meaningfully while some companies will drop debt, and so, one is going to see a mixed bag,” he said.

Sukumar is of the opinion that equities have the potential to deliver better than fixed income. “I think equities are still attractive but the story isn’t one-sided like the rest of the world. There, the interest rates are very low and the imputed risk premium for equities is close to 10% in many countries. I would say the imputed risk premium for Indian equities is probably 5% or so. So there is a reasonable reason why people should get into equities. I think they have a much better chance of giving good returns, better returns compared to fixed income but the story is much clearer in some of the developed countries,” he explained.

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Below is an edited transcript of his interview with Udayan Mukherjee and Sonia Shenoy.

Q: How do you explain the kind of flows we have been getting for the last five weeks?

A: The growth momentum has not been very good. I think for individual companies there is an intrinsic value. As long as investors see value in some of those stocks, there is a reason to buy many of them. I think that’s part of the reason why we are seeing flows.

Q: What’s your sense of what drives the market from here? As you are saying, it’s become stock specific and the market has been in a range, but do you expect it to remain this resilient?

A: I don’t see too much of a downside. I think people who are worried about momentum, by and large, are out of the market. The people who are in the market are looking at the value presented by various stocks. So I don’t see a reason why there will be any big panic selling unless the policy environment deteriorates significantly compared to where it is now.

Q: Is that a disappointment for you that so far we have not seen any great movement from New Delhi yet?

A: I think the expectations have to be realistic so we didn’t come to where we are in a day. It took the politics to deteriorate substantially for us to come to the current state. I do not think we are going to become very good in policy making very soon. The expectations have to be realistic and there is some hope that on incremental basis, things can improve and we are hoping that there will be some improvement.