Post demonetisation the market was expecting an earnings growth of 15 percent for this fiscal, which has now been toned down and one can look at a mid single digit growth for FY17, says Hemant Kanawala, Head of Equity at Kotak Life Insurance.
Speaking to CNBC-TV18, Kanawala said that the main concern is whether this will impact FY18 as well.
Going forward, the US Fed meet remains a matter of concern as their decision determines the flow of various asset classes globally, he said.Below is the verbatim transcript of Hemant Kanawala’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.
Prashant: We almost have now about 20-21 days of demonetisation impact to assess. How in your world view how much are corporate earnings likely to take a hit? You talk to all kinds of people both businesses and brokers who service you. What is your sense?
A: I know it is 21 days and it may look a long period, but it is still early days to assess the impacts on earnings. However, as a broad assumption we believe that before the event the market was expecting 15 percent earnings growth in FY17 and the same pace to continue in FY18 or somewhat accelerate into FY18. Now that expectation has been toned-down. Obviously, first half is already over, so broadly, one can look at mid single digit earnings growth for FY17.
The FY18 impact is yet to be assessed because it is too early days and the main debate is happening whether effect of this will spill over into FY18 also or not. So, it is early days for FY18 but FY17 we believe that we will look at mid single digit earnings.
Domestic earnings will get cut much more, but we have to remember that large part of the Nifty earnings or largecap indices comes from global sectors also and which should not get cut down significantly. So, broadly this is what the expectation is.
Ekta: If we have to talk about the entire remaining event triggers up till December we have the Italian referendum on the December 4th, we have the Reserve Bank of India (RBI) policy back home on the December 7th and then we have the Federal Open Market Committee (FOMC) meet on the December 13th and 14th. If you could list which one would be the most important in terms of the trigger for the market?
A: Each one will have its own relevance but eventually Fed meeting is going to be the most relevant because that will determine the trajectory of US interest rates which in term influences lot of flows in to various asset classes globally. So, market is building in that there will be a hike in the December policy. If it doesn’t happen it will be a big surprise, but assuming that happens, what kind of guidance comes with that and what kind of rate hike we can look in FY17 will be very important data point as it will influence as I mentioned flows into the emerging markets. So, Fed meeting remains the most important event of all the three you mentioned.
Prashant: We get November sales numbers tomorrow from large number of auto manufacturers. Are you expecting any significant impact? The general assumptions seems to be that retail level things are bad, but out of the factory things are fine maybe a little bit of dip compared to what they were doing in the month of October and before but not too much. What is your sense?
A: We are also receiving similar feedback but that also might be somewhat company specific and segment specific. My sense is that overall market will not pay much attention to November numbers because they are likely to be lot of disruption there. It will also depend on the company’s policy. If some company has decided to extend credit to his distributors then their primary sales may look nice. However, eventually secondary sales are important. So, it will be company dependent and market will want to look at two months numbers rather than only November number. So, even if it is bad, you will tend to ignore it and look for the November-December combined because that is where the full impact will be felt rather than looking at only November numbers.
However, the numbers may not be right because not only in auto but in many segments wherever companies can they are extending credit to the distributors to push their sales for the time being, which is currently happening. So, November may see impact lesser than what market fearing initially.
Obviously, there is going to be negative impact but it may be less than what was built-in in the initial days. However, if the trend continues secondary sales remain weak then December series will get impacted. You cannot push credit beyond a point. So that is why it is better to look at two months combined number rather than only at November numbers.
Ekta: Would you apply the same logic to say fast moving consumer goods (FMCG) as well that you are just ignoring Q3 as a quarter and you are probably just buying into stocks for Q4 onwards?
A: FMCG, if you believe it is very low ticket items, should be first to rebound. So, they are of daily consumptions, people may postpone it for two to three weeks but beyond that it will be difficult to postpone it so they should come back quickly.
The balance sheets of most of these companies are very strong, so they can extend credit to their distributors. So for FMCG companies, if you believe in the medium-term prospects and if your valuations are comfortable, then from just pure earnings point of view they should be the first one to rebound from this slow down impact.
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