The change in the earnings estimate has been largely led by lower earnings in banks, which is likely to drag in the short-term, says Anup Maheshwari of DSP BlackRock Investment.
With a good credit policy and recognition of bad loans in the banking sector, earnings will pick up in the next few quarters, says Anup Maheshwari, Executive Vice-President, Head-Equities & Corporate Strategy of DSP BlackRock Investment. While he doesn't see earnings growth beyond 3-4 percent in FY16, he is hopeful of a 15 percent revival in FY17.
Speaking to CNBC-TV18, Maheshwari says this change in the earnings estimate has been largely led by lower earnings in banks, which is likely to drag in the short-term.
Amid global risks that seem to be a permanent challenge to the Indian equity market, there have been conflicting signals on the foreign institutional investors (FII) flow, he adds. However, even with this, investors' interest in risk assets has increased.
Sectorally, Maheshwari is positive on agrochemicals. He believes the balance sheet of companies in the metal space is still a worry.
Further, he has a positive view on private sector banks with high CASA ratios and believes that the current improvement in cement demand looks sustainable going forward.
Below is the verbatim transcript of Anup Maheshwari's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: The Nifty has already recovered about 15 percent from its 52-week lows. Do you think a firm bottom is in place or is there any market risk that has the potential to take the market back to those lows?
A: Market risks are part of the market, we cannot do much about that so one can never say never but I think we are definitely sowing the seeds for improved conditions generally. Hopefully, good monsoon help after two bad years but it will take its time to come through in the system. We had a fairly good credit policy which placed the base for lower interest rates. We have got into a scenario where thanks to recognition of bad loans somewhere down the road maybe four-five quarters down the road, we would have seen banking earnings beginning to pick up from low trough of the next few quarters.
So all through, we are getting into a scenario where there is an improved earnings outlook. For the last few years the biggest stress points in earnings have been in banks, commodities and capital goods. I think commodities also seem to have found some sort of bottom now. So all put together, it is making us little more optimistic about the earnings outlook through time but for markets it is not going to be a smooth ride. That is very clear because there are so many other global factors to think about.
At this point in time, markets are fairly priced, in any case they are not that cheap anymore. We need to see some earnings coming through to keep markets going.
Latha: The markets as a whole you may consider valued but there will always be pockets. Has the monsoon been discounted if the IMD letter today does say it is over 100 percent of rains that of long-term average rains that we will get, will there be pockets that will open up as valuable?
A: They will deep. As I mentioned, it takes time to transmit in the system. Having had two droughts right now the situation in the rural side is so bad that you probably need a good rabi and a good kharip as well not just one season being good.
So, I think from that point of view, these monsoons are very important and of course markets do look a little ahead of the scenario. So we will see some interest coming into companies that have suffered because of poor rural demand for the last few years. However, there was this expectation or the hope that monsoons would be good. We have to see as it evolves. You are absolutely right, there are always pockets in the market pretty much at any index level, there is some part of the market that looks interesting. Now is no different.
Sonia: Would you buy into any of these monsoon related themes now or would you wait for more details from the IMD for at least one phase of the monsoon to play out because as we speak a lot of the tractor makers, the agri-seed related companies are gaining quite a bit?
A: Agrochemicals is an area that we have always been positive on and we have pretty much sat through some positions, we have been through the bad times for last two years. The good thing is in that sector broadly, there are good quality companies, good return on capital ratios, which have obviously suffered in the last couple of years but this is the nature of that business and it is cyclical and we have seen buying good businesses at bad times always yields the right results. So, I had categorised it in that phase. So it is an opportunity to look at some of these names and to add to.
Latha: How positive are you of the metal stocks in particular steel? Do you think that it is priced in the bad news or is it like the Indian agriculture, you need couple of years before they will be valuable and they are still doddering?
A: These are seriously cyclical names and they have already risen a fair amount from their lows recently. The outlook is definitely better, thanks to all the import duties that have been put in place but balance sheets are still not in great condition. So there are very few opportunities to look at into that sector. The few that are being looked at have been performing quite well already.
So, it is being driven by the stock specific situations more than anything else in company specific news and corporate actions. So it is not that easy, it is not a sector that we want to have a very high weight in at the moment considering that recent rally that has occurred. It is definitely still very cheap but there are a lot of factors that have to fall in to place for a sustained return from some of these stocks. So we probably will be looking to look to add to some of these into corrections or into a slightly lower levels than they are today.
Sonia: Until about six months back, the biggest risk for our markets was global in nature whether it was in the form of a Chinese slowdown, the oil crash or even the impending Fed rate hike, do you think all those cues have settled or is that still a big risk?
A: Global risks are permanent. They never seem to settle down and there is always a new risk to discuss every quarter. We see it is still fluid, there is no one answer to it. I doubt things have settled down globally to the magnitude we would all like. Growth is still a challenge.
So you will keep having these periodic issues around currencies, around commodities, around growth generally in interest rates. That is why I am saying, it is not necessarily a very smooth ride, markets will be choppy through all these scenarios and they are very unpredictable events. So you cannot plan your portfolio around these things. You will have to look beyond it and look at the earnings revival and maintain a positive position overall through this entire cycle.
Latha: What kind of an earnings growth are you expecting in FY16 itself counting the quarter that is underway and what will you calculate or estimate for FY17?
A: With nine months already done and this quarter coming through, the big delta that has occurred or the change that has occurred to earnings estimates has largely come from the banking system because people were not anticipating the asset quality review (AQR) coming through and the amount of write-offs they have done in the last couple of quarters including this quarter. That sort of changes the overall number but overall in terms of earnings, we are looking at this being maybe a 3-4 percent growth year FY16, not much beyond that.
However, as I said, if you see through the cyclical factor, we actually probably have 8-10 percent growth across some of the non-cyclical names. So, as we head into the next year, the banking will continue to drag a little bit until books are cleaned up and there is some amount of write-offs that still needs to be done. However, clearly from a commodity standpoint, from a fair amount of other cyclical names in the index, we are seeing pretty much FY16 being a low base.
So, from that point of view I would say, FY17 should be better in terms of earnings ex-banks. Hopefully as we approach the fag end of FY17 and most of the banks numbers are also discounted by the market and reflected, you will pretty much have a low base for most of the market.
Latha: What is the number you are working with you said?
A: We are working on about 15 percent growth on FY17 as of now and that is pretty much where everybody plants the flag at the start of the year and then starts making adjustments depending on all of these one-off factors.
Sonia: How have you read into the flow situation because in the month of April, the FII flows have started to pickup? In your interaction with foreign investors do you get a sense that the mood towards India has improved and if yes what are the two or three factors that could have led to that?
A: It is conflicting signals on the FII front still in the sense what we hear from various brokers is that ETFs have been buying and they have been contributory factor to the FII flow. However, a lot of the conventional long only funds which have been invested for a fair amount of time, particularly in high quality names, have been selling consistently through this phase and that is a trend that seems to be continuing. So, it is a mix trend amongst FIIs, it is more ETF driven flow.
ETFs we find very difficult to predict frankly in terms of when they may turn and when not. So, we will have to see. I don’t expect it to be a nice seamless flow right through the year; I think it will be choppy as we have seen in the month of March as well. However, net-net, again the hope is that by the end of the year the number will be little better.
Latha: What is your sense, will risk assets have a very rough run or will they see more gains from here on, how are you interpreting the move of risk assets and will India be an outperformer?
A: There is more interest in risk assets today than there was three months ago. I think the very fact that commodities have come back, we have seen more the high beta part or the cyclical part of the market doing better over the last since mid-February particularly and people are therefore as always happens, they look at the trend and try and extend that. So, there is a little more interest in emerging markets (EMs) today than there was three or four months ago for sure.
Where does India stand in that? To the extent it is a cyclical rally, it actually favours some of the other cyclical EMs a little more than India because they are the ones that had fallen the most and have also risen the most in the last few months. So, there is this natural desire to look at some of those other EMs as well considering the fact that most funds or EM funds are already overweight on India. So, it is a bit of a mix picture for India; just EM interest doesn’t necessarily automatically mean India will outperform. I think it is just where we are today in this whole cyclical move and how long it extends will determine which markets behave better.
So, the more cyclically oriented EMs might do a little better in this current sort of short-term momentum, call it whatever you want, relative to India. However, we are not doing too badly on our own as it were.
Sonia: Coming back to some themes that this market has preferred in the last fortnight, one of the rock stars has been cement. A lot of these stocks hitting 52 week highs and companies like UltraTech Cement telling us that there is double digit growth in the sector, how convinced are you?
A: There is definitely improvement on the ground. We have seen fair amount of activity on the road side, construction side, and cement demand definitely is looking a lot better in the last three to four months. So, there are enough indicators suggesting that there is activity happening on the ground. We are seeing construction equipment doing better, mining related work improving. So, all that put together, it is not surprising for us that cement demand is improving and it is in our minds, quite sustainable.
So, it is an interesting sector. The whole in a way material segment, cement and a lot of other material seem to all as a category doing fairly well driven by different aspects. However, they have got fairly good numbers coming through in our opinion over the next year or so.
Latha: If you are looking for a number in terms of an annual return from Indian equities, what would that number be; if you are not comfortable with 12 months, then 24 months?
A: Can Indian equities still outperform most of the other asset classes available? I think so. Can we eventually deliver 10-15 percent returns as an asset class for an extended period of time? I do believe so.
Latha: Only on the finance sector, which part of it will you play, non-bank finance, private, or public?
A: The private side is I think the long-term structural side which remains fairly good and frankly in this whole scenario their situation has only improved as the industry has consolidated because they are in a very good position to take advantage of the next credit cycle with PSU banks being a little wary of lending at this point in time. So, private sector banks with high CASA ratios would do really well.
NBFCs have also done well and will benefit from lower interest rates quite significantly. So that is an interesting area. We will see more bank licenses coming through so we will have to look at it from that angle.
Public sector banks and some of the wholesale driven private sector banks, we have still got some clean up that needs to be done. So, my sense is six months from now, they will probably be in a much better position where everything would have been fairly reflected and at that point in time I think that will be an interesting sector also to look into further.The Great Diwali Discount!
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First Published on Apr 12, 2016 10:00 am