Earnings pick-up to take a few more quarters: Emkay Global

Investors are open to backing new ideas according to Emkay Global Financial Services. The investment advisory says that the rural economy needs more time to pick up and that the the acceleration in segments catering to these sectors will likely be seen in second half of fiscal year 2016-17.Domestic investors are evaluating earnings pick-up of companies which is expected to take place in a couple of quarters, Krishna Kumar Karwa, Managing Director and Chief Financial Officer at Emkay Global Financial Services, told CNBC-TV18.Meanwhile, Dhananjay Sinha, Head-Institutional Research-Economist and Strategist at Emkay Global Financial Services said that the advisory expects a moderate credit growth for public sector banks. He added that recapitalisation is still a structural issue for PSU banks. The IT sector has seen a subdued start to FY17 and revenue guidance projected by companies like Infosys has led to correction in IT stocks, he added. Investors looking at possibility of reduction in margin for Infosys and they may see value in Infosys post consolidation, he said. 
Sinha also said that in the mid-market segment investors are looking at stock-specific ideas. Their expectations from mid-value stocks is being tempered as they have realised that in a low-interest rate environment, the return expectations should be measured.Below is the transcript of Dhananjay SInha’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: How has your confluence shaped up and what is the most important and most enlightening conversation according to you?Karwa: The confluence has shaped up excellent. The response from corporates as well as from the clients across segments has been phenomenal. They have been very happy with the number of companies that they have been able to meet across market caps and the inputs that the clients have been able to get from various corporates on the way forward in terms of expectations for the next 12-18 months as far as the domestic economy is concerned has been very useful. And the key takeaways according to the various companies that we have interacted with and also with the various investors, one is that the investors themselves who are open to looking and evaluating newer and newer ideas, there is a lot of positive sentiment which is flowing amongst the investors and they are looking for new ideas to explore and to invest in.As far as corporate response and as far as domestic India is concerned, the expectation that yes, the rural economy still needs some more time to pick up, so maybe the second half should be the one where you should see a positive pickup. That is the key takeaway that we can take from the confluence.Anuj: Since you had both domestic and I am assuming foreign investors, the feedback from domestic investors in particular, because all through this month, we have seen large domestic institutional investor (DII) selling. I know some of this driven by LIC, but what has been the feedback of the domestic investors in terms of the domestic buying missing at these levels?Karwa: Clearly domestic investors are looking at valuations. So the question that the investors have been evaluating is that we have had a very good run, but to invest new money now, at these levels? They are looking very cognisant that earnings have to still pick up which will possibly take a few quarters. That is the key question that investors or domestic investors are careful about. But as far as flows are concerned, as far as the mutual fund industry is concerned, they continue to have robust domestic inflows and investors are very positive on the opportunity going forward. So, we are not seeing any feedback for any redemptions for that kind of positions.Sonia: I wanted to ask you about this because this is clearly the theme over the last couple of days and you guys did have some companies speaking at your confluence. On SBI itself, how much do you think the merger could bring about for the company itself and on PSU banks, what is your view now?Sinha: With respect to the PSU banks, generally our view has been recapitalisation, etc. is still a structural issue which needs to be addressed and so, while that is there, from a business standpoint, the credit growth is still fairly moderate. They are still lagging behind in terms of market share. There has been certain optimism in the banking stock, especially the PSU banks, largely on the back of the fact that the yields have actually come off quite significantly over the past 3-4 months and that has been feeding into a feel good factor for the PSU banks in general and there is certain action with respect to mergers and consolidation in the SBI Group. So that is also induced certain amount of excitement and the guidance on SBI asset quality also seems to be reinforcing that view. So, that is generally the view that is coming on the PSU banking side. I would say that we still focus a lot on potential to grow, positioning to grow, etc. and the earnings on assets is something that we are focused on and this is the place where we think the private sector banks are definitely leading on that. And even if you consider an improvement in credit growth some of the private sector banks will lead that growth. So, we are still focused on that. We had identified YES Bank, ICICI Bank as some of the banks that could actually do well. So, that generally has been doing well. So, we are sticking on to that view. SBI of the PSU banking space possibly is somewhat better.Anuj: The other space that I want your feedback on, especially from investor point of view is on a stock like Infosys, today in the morning it opened up, but again has sold off and it is at 52-week low while the market is at 52-week high. What do you make of that dichotomy because till about 2-3 months back, it was a leadership stock?Sinha: 2-3 months back, as far as Infosys is concerned, there was a turnaround that people were factoring in and the change in leadership over there and the change in strategy, all those things were actually reflected in some of the earnings number. The guidance have mellowed in the last quarter and the stock price has actually corrected on the back of that. And there has been a cautious view that has emanated from most of the leading IT companies and you had this whole Brexit thing that is also inducing certain amount of uncertainty. So, the concern on revenue guidance is something that people are looking at. The possibility of moderation in margins is something that investors also considering as a risk factor for this companies. We will have to see how long does it persist, but it appears that till the time this whole European thing clears up as far as market’s concerns are concerned, there will be certain pressure on the stocks. After a few quarters, you might actually see people looking at value after a period of consolidation that one can expect.Sonia: I wanted to ask you more about the comment earlier where you said that investors at the confluence were interested in entering into new spaces or investing into new arenas. In your assessment, where are the pockets that there is still value now and one can perhaps increase their holdings.Karwa: As far as the mid market segment is concerned, it is more a question of valuation or rather individual stocks on how they are valued at. That is the way it works otherwise on a segmental basis it is very difficult to look at mid market companies on a segmental basis. That is where it starts from. But what I had mentioned last time also when I had come on air is that investors are now getting used to the fact that if you are in a lower interest rate environment, then your return expectations from individual stocks or portfolios, that should also be tempered with. And also, the return expectations from the corporates themselves, that also should be tempered with. And plus, in a lower inflationary environment, a topline growth will not look as robust as we are used to. So, the whole investor sentiment now is to evaluate the same companies in a different way and look at whether they are still affording you a decent return. That is the key takeaway that I can see that the consensus is moving towards resetting the bar.