Q1 earnings: 3 sectors ICICI Pru will keenly watch

Below is an edited transcript of the interview on CNBC-TV18. Also watch the attached videos.

Q: Do you see the global market momentum lead to further upside in the Indian markets? If yes, what kind of potential upside do you see for us now?

A: Market has been in this plus or minus 10% range almost for two years. We don’t expect the market to breakout of this plus or minus 10% range for some more time. Essentially, we believe that the growth outlook has to improve for the market to move out of the kind of valuation band that we have been almost now for seven-eight quarters.

So it is possible that markets may move up by couple of 100 points but the limit goes down by 200 points as well. We are not investing for that. We are looking at what are the things that can take it up to these kind of band that we have been in for the last two years and for that too, as I have mentioned our assessment, is that the growth outlook has to improve. It is not going to happen anytime in this quarter or next quarter.

If any the odds are that the outlook might take a couple of quarters, if not the end of the fiscal, to have more clarity as to whether indeed the cycle will turn for the better. Till such time, I think the market will remain the kind of range it has been what we have seen in the last one-two-three years several quarters as a matter of fact.

Q: Just wanted your views with regards to the earnings season, which kicks off next week with HDFC, then followed by Infosys and TCS?

A: If you look at the last, the time series of the earnings the kind of experience one has had it has been a case of moderating earnings growth from 20% plus to almost a high single digit number. Our own belief is that the current quarter is going to be like what it was for the last quarter as well. In aggregate perhaps the market is going to see a single-digit kind of an earnings growth and in that we are obviously keenly watching, while all results are important, the results of banks, consumer and IT services companies.

We believe these three could be, what should I say, a potentially a market direction impacting. Whereas most of the results in our view — not withstanding some positive, negative surprises — are not going to be that game changing. Our expectations are that the growth is going to be modest, but within the aggregate growth the sectors that we would be keenly watching would be these.

Q: So when you say market direction impacting what do you mean, for banks are you expecting it to be a weak set of numbers this time around and then drag the markets lower?

A: Our current expectations are that FY13 the slippages and the credit cost would be, particularly the slippages, would be somewhat better than FY12 but given that the growth has slowed down much more than what we anticipated it as a result one is keen to see how that impacts the delinquencies and therefore the outlook for the credit cost.

The reason one would want to watch these results closely is that that could be something that impact significantly a large part of the market, financials is almost 20% of the market and therefore that becomes very important.

Q: A bit of sluggishness has been coming from the IT sector. We have Wipro, which is down a 1.5%. There are more concerns coming in that maybe there could be an increased trend of on-shoring activities in the US and besides that there is some concern coming in on guidance from the big boys within the IT space going forward. What is your view in terms of earnings from the IT space this time around?

A: Yes, as I said one of the three sectors that we are keenly watching is the IT services, as you know the expectations going into the current quarter and the full year has been that IT services industry while it is going to grow slower than what it has grown last year or the previous year, but the growth would still be close to double digit for most companies and maybe somewhat better than that for some of the companies, which are growing faster. However, in the last 2-3 months if you look at the results of the companies that have reported in the US as well as the commentary from the local companies the commentary has been one of moderate in the growth expectations.

At this point in time our view is that perhaps at the end of the results season we would expect the IT services companies to grow a tad slower than what we might have begin the year with and that is what our expectation is. Of course, we would be happy to be positively surprised, but the way things are panning out, that remains our view.

Q: You seem to be a little cautious on the market. What are the worries or the cautious events from hereon? Would you be worried about the monsoon situation not panning out well? What is your key concern now?

A: Our concern has been as I said things have come to a point where earnings growth are 5-6-7% and obviously in such a growth outlook, growth scenario it’s very difficult for equities to outperform fixed income returns. So growth outlook has to improve and at this point one is very uncertain as to when the growth outlook would improve. So therefore what we are doing is that in this market, looking to either stay invested or looking to invest more in stocks and sectors where the long term prospects are good but because the near term outlook is hazy or cloudy the stock valuations have come to very attractive levels.

As such I don’t have a very strong view that market will necessarily breakout of the band which I have been talking about anytime in the next two, three months. That’s the way we are positioned at this point in time. If you ask me the worries, I would say going into the results, in particularly one thing that as I said in addition to IT services and banks I also talked about consumer. If you see last two years one sector which has shown consistently 20% plus kind of a profit growth has been this sector and given the thus far the monsoon experience has been somewhat below expectations, given that the consensus seems to be that the government has to reduce the fiscal deficit, the fiscal expenditure therefore the tax as a headwind for some of the grass root consumption demand.

Therefore one is very keenly looking at whether if the kind of growth that the consumer sector has seen in the last two-three years will it sustain. Our own house view is that to be cautious on that because we believe, we have seen most areas including auto, including some of the other discretionary consumer kind of sectors have seen slow down. The FMCGs what has not seen broad based slow down although one or two companies have shown soft numbers in the last quarter as well, so we are keenly watching that sector.

Q: Just wanted more perspective with regards to what you are expecting from the RBI going forward because pre the policy on 31st July we have the inflation data as well as the IIP data, which in fact comes out next week onwards. What would your perspective be on the data points and how you expect the RBI to move?

A: Of course last time central bank did surprise the consensus by not doing anything. Our own view is that the fact that inflation data is going to somewhat be more softer than what it was last time. However, given the weak monsoon thus far, it’s going to be a close call as to what the central bank will do, but as a house view more importantly from an equities perspective our view has been that even if the monetary easing happens it’s not going to be to an extent where it can really swing the needle. Our view is that even if the interest rates were to be maybe a 50 or 100 bps lower, it is not as if that it is going to really kick off the investment cycle or it is going to lead to a big release of the demand pool.

Our own view is that perhaps sentimentally on the day of the policy action depending upon what happens the market can move one way or the other, but over a medium-term that is not something that really matters because in our judgment for monetary stimulus to have a sufficient impact it will have to be a significant stimulus, which means that we must see market particularly I am not talking of what the short-term rates are, but I am talking of the private sector borrowing rates over a tenure, there we don’t really expect interest rates to come off by may 2-3% or something like that for it to really act as a stimulus.

Coming back to specifically in the upcoming monetary policy, our fixed income house view is that the odds are in favour of a status quo rather than a cut given that the weak monsoon may mean that the inflationary pressures will remain, the tail will be somewhat longer than what one would have thought otherwise.

Q: Where does one really put their money now? If you are cautious on consumers, you think banks and IT may not deliver good performance this time and interest rate sensitives also don’t have too much of a bright future at least in the near-term, how do you really position your portfolio? What sectors would look lucrative now?

A: Of course when I said that the outlook for so many of the sectors in the short-term is not that bright doesn’t necessarily mean that there aren’t investment opportunities. Ultimately stocks, investing and the near-term outlook is completely different, because if you wait for everything to be sunny and very clear and 100% clarity on everything, the valuation will not be what you would like. Therefore, a lot of variables are very cloudy. But the kind of companies that you may want to invest in are available at the kind of valuations that you want to invest in or should still invest.

In our view for example a lot of utilities, the state owned utilities, be it power utilities or gas utilities are available at very attractive valuations from a long-term perspective, although near-term their earnings may remain flat or may not grow that much. Likewise we believe some of the cement companies have done very well in the last few months, but I think from a long-term investment perspective they are still very attractively valued.

Likewise, we believe the energy companies, particularly the state owned energy companies there could be still some upside from where they are today given what is happening on the oil dynamic as well as what all government needs to do to rein in the fiscal deficit. Therefore there are not investment opportunities always. There may not be investment opportunities for instant gratification, but there will be for patient long-term investor.