Speaking to CNBC-TV18 Sanjeev Prasad of Kotak Institutional Equities said that corporate earnings have been a mixed bag this time around. Even within a sector such as cement, there have been companies like Dalmia Bharat which have done well, while others haven’t disappointed with 10 percent declines in volumes.
He likes Infosys from a valuation perspective. The Street expectations on the company have come down and everybody is building in low double-digit top line growth. There is some stability on the margins side, he said, even as valuations are trading at 14.5 times March 18 basis.
2016 saw good flows into EM equities but the last two weeks FIIs have been selling. He said what drove the flows into EMs post the Brexit were hopes that global central banks would undertake monetary policy accommodation which happened with Bank of England. Now, there are not much chances of rate cuts. Bank of Japan and ECB won’t be cutting rates too much now, he said. The market is starting to factor that in, he said.
Also, declines in yields are tapering off. “The yield story is coming to an end,” he said. On the back of that, a lot of macro flows since early July have started to reverse, he explained. This is passive macro flows which come in and go out quickly.
He is bullish on SBI bullish as he believes the NPL problem is peaking out. The banks has recognised the bad assets in two troubled sectors – steel and textile. Also on the resolution side, it is playing out well, he said.Below is the verbatim transcript of Sanjeev Prasad’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: What is the feeling you are getting about the market how have you read into the earning seasons so far? Have you been a bit disappointed with the texture of earnings this time?A: The results season has been a mixed bag; you have seen some companies reporting pretty decent numbers within the same sector which is very surprising. So, if you look at a cement sector for example you have a Dalmia Bharat which has done very well, very strong volume growth, 20 percent kind of a number, whereas some of the companies have disappointed quite significantly with as much as 10 percent decline in volumes. So, it is a very mixed picture out there.If I extend this across the larger universal stocks, which we cover it is a similar thing. Some companies have beaten numbers quite significant for example Oil and Natural Gas Corporation (ONGC) which has reported -- yesterday -- significantly higher numbers compared to our expectations whereas Indian Oil Corporation (IOCL) in the same sector reported somewhat weaker numbers compared to expectations although on year-on-year basis the numbers were still pretty fantastic.It is very early days in the result season I would say. Still we need to compile all numbers and see what is the overall numbers like. However, if I look at Nifty 50 numbers and whether the earnings per share (EPS) has changed significantly, it hasn’t. However, if I look at March 2017 number we were earlier about 436 or so it has gone up a little bit it is about 445 now. So, there has been some upgrades during the results seasons, which is a good thing I would say.Anuj: I just want to ask you on Infosys, what is the houseview now as we speak the stock is at 52 week low again?A: We like the stock in a sense from a valuation perspective starting to look reasonably attractive now. Obviously, one can debate whether the numbers will come through or not as projected. However, I think now the street expectations have also come down pretty significantly. I don’t think anybody is building in much higher than low double digit kind of topline growth. We have 10 percent odd topline growth for March 2018.Some stability on the margin side, on valuation front the stock is now trading at about roughly 14.5-15 times on the March 18 basis, so from valuation standpoint it does look pretty okay.The other thing to keep in mind is looking at whatever is happening globally and finally looks like global market are starting to factor in the prospect of a US Fed rate increase in December followed by maybe couple of more of in 2017 calendar year and on the back of that of course global yields have hardened and more important dollar has been strengthened quite significantly. You need to have some dollar hedge in the portfolio and IT serves that purpose quite well given the valuations at which the stocks are trading at currently.Latha: I am going to come back to you with some stock specific questions but first on flows -- 2016 has been an amazing year for flows into emerging market equities but the last two weeks what we have seen foreign institutional investors (FII) selling not just in our markets but in other emerging markets. Is the trade over or is it a lull before US elections and Fed rate hike?A: What drove the flows into emerging markets post Brexit referendum was the expectation that the global central banks will do a lot more in terms of monetary policy recommendation, which happened from Bank of England. They announced after a long time and also cut rate, so that played out reasonably well.However, now if you look at where the markets are, market are starting to now worry about the fact that whatever monetary accommodations the global central banks had to provide that is largely done.Not much chances of any further rate cuts from where we are because in terms of at least let us look at Bank of Japan and European Central Bank (ECB), I don’t think they can cut the rates too much from where we are. If you look at US Fed on other side, it is looking at raising rates at some point in time. The market is starting to factor that in now. So, clearly the expectation, which was there that central banks will provide the backstop forever, that is gone.On the back of that whatever re-rating of asset classes had to happen because of continuous decline in yields that story is also over. It looks like global yields have moved up very significantly in the last two weeks.On the back of that, a lot of macros flow which came in starting from a early July or the till the early October that is starting to reverse I suspect. This is largely passive macro flows basically, which just come and go out very quickly.I guess at this point in time the yield story is coming to an end as far as the global markets are concerned. Now we have to look forward to whether the recoveries are sufficiently strong enough for earning upgrades to start taking place. I am talking about a global basis.We are in little bit of a funny situation in a sense you know the monetary cycle story is probably coming to an end. On the other side, you are not seeing sufficiently strong growth as far as global economy is concerned, which can provide the next level of stock price performance from where we are so that is the funny situation where we are in as of now.Sonia: Recently, you have topped up on State Bank of India (SBI) over the last few months. What makes you so bullish on that stock?A: The story over here is the belief that non-performing loans (NPLs) recognition problems is now more or less coming to an end. At least the public sector undertaking (PSU) banks have been early enough in recognising the NPL situation. If you look at they started recognising NPLs from first quarter FY16 and the slippages numbers have been very high. Off late you are starting to see a decline in the fresh slippage numbers over there. So, looks like the NPL problem seems to peaking out at least from a recognition perspective.Now is the second problem which is resolution and recovery part. The good news is from SBI's perspective if you see at least on the two troubled sectors where they have lot of exposure which is steel and second one is textiles in both of them at least they have recognised pretty significantly. In case of steel, if I remember correctly they have recognised 35 percent of loans as NPLs similarly in textile number is 21 percent.Power, there will be still some recognition of NPLs because as of now it is 25 percent of all the power sector loans, which SBI has. I suspect there will be some upward revision over there, but probably that problem is coming to an end.On other side if I look at the resolution problem and this is something which we have been seeing for the last six months that this time around Indian promoters have no option but they have to sell assets wherever they can. Whatever profitable assets have been in group or in a company they sell and somehow reduce the leverage.So, the worry which was there that if we have Rs 100 of NPLs and you will have a very high loss, I was somewhat less concerned about that part. I was obviously very worried about the overall NPLs numbers 17-18 percent of the gross, which will play out but the recovery part also seems to playing out simply well. You had one transaction which happened recently, the Essar one, so that is a template in way. You are already seeing Jaiprakash has been forced to sell most of their cement plants now.I suspect that going forward wherever you are seeing within a group, you have some profitable or a valuable assets that will be sold off to eventually reduce the leverage in the group or within the company. So, that is what made me simply positive on some of the corporate banks such as ICICI Bank and SBI when they had come down pretty sharply and people were worried about the NPL problem.If you look at valuation side, if you look at the consolidated book of SBI on a March 2018 basis it was reported to 310 or something like that. Even if I assume that whatever net NPLs which they will have at that time which were somewhere about 3.5 percent they will knock it off against the book value, you still will be left with a book of somewhere about Rs 230-240. If you take out Rs 40 of about value of all the investments which it has when SBI Life Insurance which will fund etc and these are very good businesses Rs 40 from 260-220 this stock is still available at below book as of now.
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