Consensus earnings estimates for FY17 and FY18 are way off charts, said Manishi Raychaudhuri, Asian Equity Strategist - Equity Cash Asia Pacific at BNP Paribas. He pegged earnings growth for FY17 in single-digits and for FY18 in low double digits.
Indian markets haven’t completely factored risks such as protectionism in IT sector and earnings which can lead to short-term volatility in the markets, according to BNP Paribas’s management. Besides, consensus earnings estimates for FY17 and FY18 are way off charts, said Manishi Raychaudhuri, Asian Equity Strategist - Equity Cash Asia Pacific at BNP Paribas.
Raychaudhari pegged earnings growth for FY17 in single-digits and for FY18 in low double digits. He told CNBC-TV18 he expects a 7-8 percent EPS growth in FY17 and a 12-14 percent EPS growth in FY18.
Auto sector has withered demonetisation and the worst of the note ban has been put past, Raychaudhari said, adding, the sales volumes should improve going ahead. Companies are generating cash organically and he expects inorganic expansion abroad to pick up significantly.
Below is the verbatim transcript of Manishi Raychaudhuri’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: What is your call on the Indian market now? It has underperformed not just the developed markets but even emerging markets, do you think we can correct some of the underperformance going forward?
A: If you notice the performance over the past couple of weeks, part of that underperformance of the last quarter of 2016 has been partly corrected. It has come in two ways -- number one is the Indian market has recovered slightly. So it is up about 3-4percent this year.
At the same time, some of the other regional markets have underperformed. I would think that some of the risks to the Indian market in the near-term are not yet fully priced in. So we would possibly see some very short-term volatility and this volatility would arise possibly around this result season that we are seeing because this result season would possibly underscore the point that consensus earnings estimates for both fiscal 2017 and fiscal 2018 still remain too high and need to be brought down. I am still seeing for indices like the Sensex or Nifty, consensus EPS growth estimates in the range of possibly about 14-15 percent for fiscal 2017 and closer to about 18 percent in fiscal 2018. Clearly, these numbers are way off the charts. It is impossible for the markets to generate this kind of earnings growth in the near-term.
I would think single digit earnings growth for fiscal 2017 and just about barely double digits to early teen kind of growth for fiscal 2018 would be more plausible at this point of time and that could be the near-term risk to this market.
Latha: I wanted to ask you about Axis Bank itself, what the view is and generally how would you look at the corporate facing banks, we will come to the retail banks in a bit?
A: I won’t comment on any particular stock in this case but in general if I look at the private banks earnings that have come through, they have been diverse. In some cases, they have outperformed compared to expectations and some other cases like the results that came out yesterday, they have underperformed as a consequence of credit cost being higher. So we think that this higher credit cost compared to what the market was expecting, this is a phenomenon that is centred around those corporate facing banks, which you talked about.
The retail facing banks on the other hand have much less risk of credit costs being higher than expected and that is the reason why we are still in the camp, which prefers the retail facing private sector banks in India.
Sonia: How are you going to approach the entire technology space? We had comments coming in from Infosys as early as last evening saying that there is a lot of uncertainty with respect to Trump’s policies and what actually may play through over the next six-twelve months, do you expect more derating of technology stocks over the next six-eight months?
A: That is a difficult call to take at this point of time. We have seen some recovery in the technology stocks valuations. The top run frontline stocks are up possibly about 10-15 percent over the last couple of months but at the same time, the risks that you mentioned that of protectionism and the risks to the H1B visa that the Indian technology companies always take advantage of -- that is a moot point.
In general, if I look at the markets -- financial markets all across the world -- the potential good or positive impact of a Trump administration, which is financial reflation, fiscal stimulus and therefore accelerating growth -- those expectations have been factored in into valuations but the so-called bad Trump concerns or risks arising from protectionism or trade wars etc, I don’t think they have been factored into the stocks by and large at this point of time. So while in our Asian model portfolio we do have an exposure to the Indian IT stocks and we are not moving away from that exposure right now, I think investors would have to be selective in this particular area.
One way of choosing those stocks could be to choose those which have not utilised their H1-B quotas there are quite a few Indian companies who have pretty significantly H1-B visa quota but they are currently utilising less than half of that.
So those could be slightly immune to the kind of pressures.
Latha: What is the sense you are getting about at least auto ancillaries in general broadly your comment?
A: In general, the auto sector is something that we like in India. Of course, some of their recent numbers have been disappointing as a consequence of the demonetisation exercise but now we are at the fag-end of that entire exercise. That is over and done with and it is possibly largely behind this. So, we would think that some of the key volumes in two-wheelers or passenger cars should improve going forward. They had anyway been on an improvement path. So those are the sub-segments that one should focus on. When it comes to ancillaries, obviously the companies that supply to these sectors should be on top of an investor’s radar.
One other interesting point that came out from the previous conversation was that companies are now generating cash and they don’t have any avenues to invest domestically. We know for example that private sector corporate capex is still not picking up because capacity utilisations domestically are quite low. So I would think that this route of inorganic expansion particularly inorganic expansion abroad that is also likely to pick up quite significantly. Therefore we are going to have more and more Indian companies, which would possibly grow as a consequence of developed market growth acceleration not just because of what is happening in India.
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