Alchemy Cap expects Q3, Q4 earnings to be better than Q2

Hiren Ved, Director and CIO of Alchemy Capital Management feels the Reserve Bank of India (RBI) may not be ready to ease the repo rate at this point in time.

The (RBI) faces growing pressure to cut interest rates later on Tuesday for the first time since April after the finance minister pledged to rein in the country's fiscal deficit. Remarks by finance minister P Chidambaram at a news conference on Monday that he would nearly halve the deficit in just over four years had increased the chances for a Tuesday rate cut, some analysts said. Also Read: Nifty to rise, RBI policy could be a non-event: Sukhani  However, Ved believes a 25 basis point or so CRR cut is more likely given the current liquidity situation. "A repo rate, if it were to happen, will be taken positively by the market," he told CNBC-TV18 in an interview.  In terms of earnings, he said, rate sensitives that fared well in second quarter may outperform ahead. He expects third and fourth quarter earnings to be better than what we have seen so far in the second quarter. "The earnings performance has been inline with estimates," he said. Below is the verbatim transcript of Hiren Ved's interview on CNBC-TV18 Q: What is your expectation from RBI’s credit policy? What is the market going in expecting you think today? A: If you read the language of Monetary Development Report, it looks like while the RBI has definitely moved more dovish in its stance, it is not yet ready to take a repo rate cut, if you just purely go by the language. Maybe they will definitely ease liquidity by cutting the CRR. However, as far as the market is concerned, most players are expecting that at least the RBI should move now and do a 25 bps repo rate cut. If that does not then the market will be bit disappointed with that. So, we will have to wait and see what the RBI Governor actually does. Q: What is the degree of disappointment are you expecting if we do not get a repo rate cut today? Will we move out of the trading range that we have been within for so long? A: If you look at consensus forecast, I do not think that people are expecting a repo rate cut. But as I said, there will definitely be a bit of a disappointment, because there is some expectation after the finance minister came yesterday and laid out the fiscal consolidation path. People take it as a signal that the finance minister hinted RBI that they should now probably start looking at cutting rates. The government has done the first few set of reforms and they are very serious about the whole fiscal consolidation. So, it is more of a signalling impact rather than a real impact. But it will definitely be very critical. If they go in for a repo rate cut, market will take it very positively. A CRR cut is already discounted in the market in the sense that is the least that people can expect. So, I would not say that it would be like a major disappointment, but it will definitely be a disappointment for the markets. Q: The entire month of October has been spent in consolidation after the September rally. Do you expect this to continue for another couple of months, or would the market to climb to higher places by the time the year is out? A: The trajectory is very clear that we are moving up. After a sharp move, we generally tend to consolidate and that is what we have seen in October. If we have a rate cut, we will move towards the upward trajectory quicker. If we do not then maybe we will take our own sweet time to move there. The market will kind of consolidate through the earnings season. Probably after the earnings season is over, by which time also I think the US elections are over because we have seen a little bit of a slowdown in FII flows as well, then it is back to liquidity. My sense is that we should be inching higher towards the end of the year. _PAGEBREAK_ Q: If there is a more dovish stance that is taken up by the Reserve Bank how do you approach the rate sensitive sectors? Where would you accumulate now in your portfolio? A: The move towards the rate sensitives have already happened. What will happen is that you will see that the rate sensitives which have done well in Q2 are likely to possibly get a much stronger leg up rather than just a broad brush of everything that we would call as cyclical or rate sensitive. For example, M&M numbers were good or ICICI Bank numbers were good. If we have a strong signal from the RBI then it is most likely that the companies which did well in Q2 will possibly be off to a quicker start in terms of appreciation rather than let’s say for example, a PNB or a BOI where the numbers were not that good. So, there will be some kind of a differentiation even within the rate sensitives. The ones which have fundamentally done better or are expected to better will have a larger benefit from a stock market appreciation perspective. Q: A significant part of this expectation of a rate cut also hinges around restarting the investment cycle. Yesterday, you saw the BHEL numbers - they look so insipid. How do you position yourself in that space in the light of expectations of monetary easing and where the rate cycle might be headed? A: It is not going to be easy for the investment cycle to kick-off. It is going to be a calibrated rate at which the investment cycle is going to kick in. Initially it is going to be the PSUs because of prodding from the government who will possibly start doing capex. But the private sector capex in the infrastructure area is going to take a lot of time. There are quite a few regulatory issues that need to be solved. NIB has to come into operation. Those things will take a bit of a time. So, while we are approaching that, it is going to be a calibrated move towards the movement of the investment cycle. A couple of repo rate cuts would be required to get that thing going. So, maybe two successive repo rate cuts and then you could really see the investment cycle moving in high gear. But till then I think one will have to take a very selective approach towards that sector. The rate sensitives like the consumer discretionary will be much quicker to respond rather than the cap goods or the infrastructure companies. Q: What have you made of the earnings season so far? Do you think the worst of the downgrade cycle is behind us? In terms of individual stocks, where is your highest conviction level now post the earnings that you have seen apart from the ones that you spoke about like M&M and ICICI Bank? A: The earnings cycle has been quite okay so far. We have not seen either significant beats or significant misses on either side. I would say that we are definitely approaching the end of the downgrade cycle. So, we should see some stabilizing which would happen. I think Q3 and Q4 should be better. Q3 largely for the more consumption oriented sectors because this time the festival season has moved a little later. So, Q2 numbers were not great, but for the more consumer discretionary oriented sectors, Q3 should be better. For the more cyclically oriented sectors I think Q4 for things like capital goods etc. should be more important. My own sense is that what we are seeing from a positioning perspective is that I do not see a very significant move towards individual sectors. I still feel that it is going to be a market which is going to be more selective and stock specific. Therefore, I think some of the better cyclicals might do better. For example, Larsen had reasonably good order inflow numbers. So, probably within the cap goods space that would be a stock which could do well. I think ICICI Bank should do extremely well and some private sector banks which have shown good results. I think that is where the big conviction is going to be going forward as well.