Earnings improvement likely only from Oct: HSBC Global's Pradhan

However, two or three positive things that we need to concentrate on is that next year on a base effect, will substantially increase the earnings number and if you give this economy another 12 months the real revival will begin post that and then you will have another year of significant earnings growth on top of what you will see optically for FY17. 

If you are looking for robust earnings growth for the next two years as a result of these two actions, the market seems to be optimistic from my point of view to enter. However, volatility is going to be the case for the next quarter or so or maybe even two quarters for the fact that the real number are not likely to be seen in this earning season.Latha: You are sounding confident about the proverbial green shoots. When will they really merge as slightly longer bushes? Would it be first quarter of next year, second quarter of next year, second half of next year?A: You will see the first numbers pick up come only in the second half of next year is what my opinion is, simply for the fact that if you look at the year-on-year (Y-o-Y) comparison, the third quarter financial of the current financial year as well as this last quarter of this current financial year, there has been a significant drop in earnings growth vis-à-vis the year prior to that. And when you look at a base effect, even if you assume a normal recovery or even for the fact that volumes will start adjusting to the slightly higher prices that we may see this year, you will see a pretty substantial jump in earnings growth only in the second half of this financial year.So, again, as I said, these recent numbers, the ones which will keep getting printed for the next couple of quarters are not really something which will excite the markets and as a result of which I believe the market will remain volatile. And there is no reason to believe anything so far because the numbers will not show up. But, the base effect will start working only in the second half of this year and then hopefully, the economy turns around and you really see true earnings growth in the FY18 financial year.Latha: So even in the third quarter next year, you are only expecting a base related improvement in earnings. Economy turning around is even further out.A: Absolutely, because what is really happening in the last couple of years is that there has been a lot of public spending. We are seeing orders being spread either through the roads or through the rail areas in the economy. That is going to translate into topline for companies only once the orders are actually with the company and they start reporting those completions on a quarterly basis. The margins continue to be under pressure, because either these companies are leveraged or the fact that there are certain issues of growth otherwise, apart from just these public expenditures. So, what we are hoping to see is that this kind of activity starts reflecting in the numbers optically in FY17 and then slowly, it starts to get into real numbers in the year after this. So, again, what I am trying to say is that the market does not the realness of the economic growth. It does look at reported earnings. And reported earnings are likely to jump pretty substantially in the second half of the next financial year that is FY17.Reema: I was seeing a couple of your fund holdings and I do not see a lot of energy in it. Now we have seen commodity prices, crude prices recover quite a bit from their earlier lows. Is it time to change the underweight or cautious stance on energies sector as a whole and on individual stocks?A: That is a little bit of a difficult question to answer simply because in energy there is upstream and there is downstream. Most of the fortunes of this industry are not fairly uniform across upstream and downstream. We do believe that given the fact that the production of crude oil in the world is continuing at a very fast pace. We have already come to a point where there is difficulty in storing inventory. Now there is not enough oil to be stored anywhere. That is likely to sustain the low prices in crude, the world over. That will mean that any resurgence in oil companies reporting something differently globally than what they have been reporting for the last year is unlikely to happen right now and that might translate into lower commodity prices for the entire globe for a year or so. So, having said that, I would still think that it is a little early to venture into commodities.Latha: So, what would you venture into right away? Would you buy the economy stocks like banks or do you stay on the sidelines with defensives now and move into the economy stocks closer to second half?A: It is difficult to kind of make a very far reaching broad statement here because when we talk about defensives, there is a lot of valuation risk there. So, while there might be some security in earnings growth or the fact that cash flow will be pretty strong, the fact is valuations do not really make it attractive. So, on the whole, what I am trying to say is that we should look for early beneficiaries of an economic cycle turning around. And that is not really a very simple thing to point out to say this sector actually does or that sector does this. We need to be a lot more bottom up.We need to understand that the first initial improvement in the economy is going to benefit what company rather than a sector, because they can be diverse. They can be a company in light engineering which might benefit. There might be a company in the roads sector which might benefit. There might be a company in textiles which might benefit because of what has happened, largely as a demand increase also in this quarter. Whatever the monsoon will bring about will also lead to its own discoveries in terms of where companies will go. So, from a stock pickers perspective, this is an interesting time, these are not very easy times to find such companies as you mentioned. But there is enough opportunity. One takes time to research these things.