Corporate earnings growth is close to bottoming out, but the global picture is still hazy, Sanjeev Prasad, Senior Executive Director & Co-Head At Kotak Institutional Equities tells CNBC-TV18."As far as the market is concerned, we are probably getting near to the bottom, but there is no saying what will happen in global markets," says Prasad.The key risks are a slowing global economy, unco-ordinated monetary policy actions by central banks and the Chinese currency.Prasad says any depreciation/devaluation of the Chinese yuan will put pressure on emerging market currencies.On domestic corporate earnings, the picture is certainly improving, Prasad says.He says after a long time, there were a few cases of companies beatinng earnings estimates."If earnings bottom, this market is probably closer to finding is bottom," he says, adding the pace of earnings downgrade has slowed considerably.He sees some downgrades in the cement and banking sectors. But he feels, much of that is already reflecting in the prices.Prasad does not expect a big fall in share prices of banks even if their earnings were to be hit by higher loan loss provisions.On the government's decision to impose a minimum import duty on select steel products, Prasad says it will help the banking sector to some extent, but will not really alter the dynamics of the steel industry because of over capacity. Below is the verbatim transcript of Sanjeev Prasad's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What you made of the steel announcement. Will that make you buy any of the metal stocks?
A: I think it's a good measure as far as banking sector is concerned but I am not terribly excited as far as steel sector goes because this is a temporary measure. It's only valid for six months and maybe the government extend depending on how the situation pans out. So yes, it does help the beleaguered industry for time being but it is not as if it is going to change the fundamentals of the steel industry dramatically.
The other thing to keep in mind is what does this mean exactly and how it will be used to compute a domestic price. One of the things which concern me is even though there is minimum import price (MIP), it will change the pricing dynamics in the industry too much in the sense you have a lot of excess capacity in the domestic steel industry. If you look at supply demand numbers, current capacity is more than 110 million tonne of steel in the country whereas demand is 80 million tonne. So you already have a lot of excess steel capacity, so even if you put in MIP, does it necessarily mean that domestic price equals MIP price plus the safeguard duties plus all other taxes or you have domestic steel price somewhere between export parity price and import parity price--whatever that number be for import parity price. Therefore, not very sure that the dynamics of the steel industry changes that much and it is more if a temporary measures, so I am not excited about this.
Sonia: What about the market. Do you think we have put a bottom in place at 7,200-7,240 level that we saw last month or is there more selloffs that can occur in the months to come?
A: You are getting somewhere near the bottom. Having said that you never know what is happening to global events. If something goes wrong over there and if mood is very gloomy outside in respect to two or three things; one, a slowdown in global economy, everybody is getting a bit concerned about that. Second, somewhat uncoordinated policy action by all the central banks which is making people rather nervous about the frequent changes in policy direction coming from various central banks. Third big issue is China and how does it managed the transition in the economy and a big concern emanating from there as the amount continue to outflow as far as foreign currency is concerned, every month you are seeing about USD 100 billion to USD 150 billion of outflows and what does it mean for Chinese currency in-turn and what does it mean for emerging market currencies. So if there is any devaluation/depreciation of Chinese currency then that would put a lot of pressure on emerging market currencies and in-turn the stock market.
So if you leave aside the external events, on the domestic side things are looking somewhat brighter. I think earning numbers seem to be finally bottoming out. If you look at this quarter, for the first time I am seeing some earnings beat compared to whatever expectation we had after several quarters. As of now Nifty earnings are running about 2 percent ahead of estimate for Q3. The pace of earning downgrade seem to be slowing down, so we have seen about 2-3 percent earnings cut this quarter but nothing meaningful compared to the pace of downgrade which we have seen over the last 12 months. So if the earnings number can find some sort of a bottom then this market is getting to finding a bottom but never know with global events.
Latha: Are you reworking any of your earning numbers even if it is for specific stocks?
A: Of course for the steel sector the earning numbers did increase and analyst increase the numbers based on at least temporary protection which is available. So we have assumed that this will be available for three years' safeguard duty and MIP system but let's see how far this is extended. So that has put a floor to the earnings number in metal sector, on the ferrous part. On the ferrous part thankfully we have seen some bounce back in commodity prices over the last 10-15 days. Most of the prices zinc, lead, aluminium, all have bounced about 5-7 percent from their lows. So chances of earnings downgrades in the metal space has come down dramatically compared to how worried we were earlier, so that is helping. However, oil price also bounced back so that is also helping, at least trailing the concerns about large downgrades in the upstream sector.
I still see some earnings downgrades coming in cement industry names but having said that these are very small sectors and will not materially change the overall numbers of the Nifty Fifty index. If you look at our earning numbers, currently for the Nifty Fifty for March '17, we are looking at about slightly below 490, when we started the Q3 result season; we were about 500-504 or so. So there has been about 2-3 percent cut but at least based on whatever number I am looking at on a more bottom up basis across various sectors. It looks like we are coming to an end as far as earnings downgrade cycle is concerned. A lot of this is also in the base now given the fact that commodity prices come out dramatically over the last several months now. So it is already reflecting in the base numbers to some extent, so hopefully next year you will start seeing some growth as far as market earnings is concerned.
So as of now for Nifty we are looking at 19 percent growth, it's at very low base. One sector where we will still see some earnings cut is, is the banking sector but most of the banks at least the corporate oriented ones are factoring in large increase in NPLs and so forth. So even if earnings numbers get cut dramatically on the back of higher loan loss provisions; I do not think the stock prices are going to decline dramatically from where they are. So we are getting somewhere close to bottom as far as both earnings and valuations are concerned._PAGEBREAK_
Latha: When you were explaining steel issue, you said that it is positive for the banks. Some research reports have said that about Rs 26,000 crore more money is available to the steel companies because you have to assume USD 50 higher price for per tonne of steel, so at about 80 million tonne being sold, it would mean about USD 400 million that the steel companies are richer by. What is your attitude towards financials, which ones are you bullish on?
A: We would look at some of the corporate oriented private banks such as ICICI Bank at this point of time. However, even before this thing came out, the stock was looking expensive at Rs 200-210, if you take out Rs 70 as the value of all the subsidies put together, the life insurance, general insurance, asset management business and so forth, you are effectively getting the company at Rs 130-140 and even assuming fairly high levels of loan loss provisions in March '16 as also March '17; we are still getting a book value of Rs 130 per share adjusted for net NPL which have not been provided for. So it is trading at about 1-1.1 times March '17 book and it is not as if the book of ICICI Bank is going to destroy even if you assume very high levels of impaired assets being recognised over the next two-three quarters, as also in fairly high levels provisioning, even then it is quite fine.
Therefore, keeping in mind the fact that quarterly pre provisioning profits of ICICI Bank is about USD 65 billion and in this quarter it was a terrible quarter in terms of recognition of impaired assets about USD 65 billion was recognised and obviously the provisional numbers going to be much smaller than USD 65 billion number. So even in worse case, if you assume everything is to written-off for whatever impaired assets is going to recognise which is a very drastic assumption because there will be some recovery eventually and loss will not exceed 20-30 percent and even in that case the work is not going to get destroyed, so I am quite fine looking at ICICI Bank at current levels.
Sonia: We did have a lot of other companies that reported good numbers this quarter, from the largecaps, names like Lupin, Asian Paints, Reliance Industries, Zee Entertainment, Infosys. If you slice through sectors, you get a lot of leaders in terms of earnings. What has your pick of the pack been?
A: We like most of these companies and Reliance has been one of our top picks for the last 9-12 months now and we continue to like it. If you look at earnings per share (EPS) which this company could report, let's say on June '17 annualised basis whenever the Q1 of the new project, you get the full contribution, this company's earnings could be in the range of around Rs 110-120 annualised for June quarter and even if we give 11 multiple for dollar linked cash to company, the fair value of this company based on June '17 earning number should be about Rs 1,200-1,300 and this is without having given any value for the rest of the businesses, zero value for telecom effectively. It's still decent at 20-30 percent upside from where we are over the next 18 months or so.
Latha: Any standout midcaps?
A: We like all the companies in the media space. So Dish TV, the stock has come off over the last few days. The results were quite okay but some disappointment in terms of the average revenue per user (ARPU) number which the company reported, but the stock is looking reasonably okay; it is trading at six times March '18, EV/EBITDA at 7.8 or 8 times March '17 EBITDA, so for a high growth business that is an attractive valuations. Similarly we also like PVR in the media space, looking like long-term growth potential of the multiplex business in this country.
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