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Last Updated : Apr 06, 2016 10:36 PM IST | Source: CNBC-TV18

Big bang reforms key to growth, drawing investors: Credit Suisse

Neelkanth Mishra does not expect any meaningful improvement in aggregate March quarter earnings since banks' financial performance will be under pressure because of asset quality issues.


Headline grabbing numbers matter to global investors, but more importantly the need of the hour is headline grabbing reforms to boost growth and draw the attention of investors, Neelkanth Mishra, Head-India Research at Credit Suisse tells CNBC-TV18.

Mishra does not expect any meaningful improvement in aggregate March quarter earnings since banks' financial performance will be under pressure because of asset quality issues. However, he is bullish on cement, auto and consumer durable stocks.

Talking about the RBI rate cut, he added that 25 basis point cut was much expected.

Below is the verbatim transcript of Neelkanth Mishra’s interview with Nimesh Shah on CNBC-TV18.

A: 25 basis points was a given, so in the market the run up that we were seeing in the past week or so perhaps was building in the expectation there could be 50 basis points which at least I thought was unlikely. If the Governor had to do it he would have done it mid cycle and not waited for the meeting to happen. So, that is part of it but I think it also because there seems to be some global risk off, those fears are somehow coming back again. In line that is why the market move seems exaggerated but I don’t think it is all to do with the 25 or 50.

Q: What is the big worry for lot of investors you met in the conference, especially towards India? You said the growth is pretty much there but they are not very confident so what would make them confident that the growth is really there in India?

A: If you are a global investor or an emerging market (EM) investor, you want headline numbers to start to look good. Now, you and I may think that the gross domestic product (GDP) numbers have big flaws and unless you get to the third estimate of the GDP which is two years later we will not find an accurate measure of what is actually happening. However, for global investors just those numbers matters, so unless you see headline industrial index of industrial production (IIP) or headline GDP growth starting to do very well you will not see comfort coming back.

There is also a lack of headline grabbing reforms and I think personally that things like UDAY, Jan-Dhan Yojana are actually very important in terms of getting growth back or even the fact that railways and central highways or national highway, road capex are doing very well. They are very important for growth and we are seeing that.

Q: The near-term number the data which investors will be watching out for is the quarter four (Q4) earnings. What is your broad sense will it be disappointing and do you think this is a quarter which will have a trough out and you will see better earnings in the next two quarters from now?

A: I think the last two quarters we have been seeing what I call a big divergence. So, if you see the BSE 100 earnings, we do our results summary in BSE 100, so 38 percent of the companies reported an EBIT decline which is the same ratio as in December 2014 so that hasn’t change. However, 26 percent of the companies reported 30 percent plus EBIT growth and that number is substantially higher than what it was. So, if you are looking for headline EPS I don’t think you will see improvement in the March quarter because the banks which have very large part of profit pool of the Sensex and the Nifty and BSE 100 they are not going to see a big improvement in headline numbers.

Q: A word on the banking because that is a big weightage and you have seen a bit of a negative reaction to the Reserve Bank of India (RBI) policy, generally what is the view on the banking stocks in India?

A: I think we have been underweight on banks, financials actually, for quite a while now and I would stay that way.

Q: However, you have been liking non banking financial companies (NBFCs), right?

A: Yes, we like NBFCs, we like some retail focused banks but the risk is, of course I take that now everyone is aware that there is NPA problem in India, so, the natural assumption people make is that this is priced in and I don’t think so. I think that this is going to – because while everyone who is involved, the Prime Minister’s Office (PMO), the ministry of finance, the RBI, they are all aware and very seriously trying to solve it in a very honest manner.

The problem is there is no solution. So, it will be case-by-case solution, it will be effectively something like death by a 1000 trucks. So, every quarter you will see some negative surprise and these are very tough problems to resolve. So, one is to recognise, second is recapitalise which is what the government is going to do once we have seen the consolidation and the third is resolve. Now, the resolution is actually much harder. So, we have seen some metal companies that have actually gone into strategic debt restructuring (SDR) and pulled back.

It is not easy and therefore over the next three or four quarters, you will see the regulators and the banks and the corporate’s sort of adjusting to this new reality. So, all the asset sales that we have seen is a sign that the corporate’s are also realising that the government is serious. It is not going to be an easy way out for them. They need to take the hard decisions. However, where the assets are clearly broken, I think we have not reached that breaking point.

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First Published on Apr 6, 2016 09:59 am
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