On the fiscal front, one is likely to feel the impact of the recent corporate tax cuts and the YTD below-target GST collections, says Chockalingam Narayanan of BNP Paribas Mutual Fund.
A below 5 percent GDP print looks difficult, even at the borderline. It is likely to be very transient, given all the steps the government has taken to boost the economy, Chockalingam Narayanan, Head – Equities at BNP Paribas Mutual Fund, says in an interview to Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) What is your assessment of the September quarter earnings? What will be the one word to describe them? What were the highlights?
A) A one-line summary (difficult in one word) could be – Focus on getting leaner and meaner until demand growth accelerates. The earnings season on an underlying basis saw (a) relatively flat sales growth, implying activity has been a bit slow; (b) improved margins – benign commodity prices (another sign of weak global activity); and (c) which led to PBT rising by a moderate 8 percent for the Nifty index– a tad higher than estimates.
On reported earnings basis, thanks to the corporate tax cuts and the relatively subdued base for financial sector, the earnings growth was around 15 percent.
From sectoral standpoints, we saw autos earnings holding up much better from lower commodity costs; banks exhibiting relatively stable asset quality trends; consumer companies seeing rural slowdown that was to some extent offset by urban demand holding up well and cement companies benefitting from improved pricing in some regions. Energy companies were mixed, with Oil Marketing Companies (OMCs) seeing weak GRMs, while gas companies benefited from the on-going transition towards the cleaner fuel. Paint and value-for-money retailing companies showed good festival demand-led volume growth; pharma companies, particularly domestic businesses, saw strong volume growth from the extended seasonal disease incidence; tech services saw some slowdown, particularly in the BFSI verticals; telcos were hit by the Supreme Court ruling on AGR.
Q) In October, fund managers increased their stake in insurance and AMC companies such as ICICI Lombard, HDFC AMC, and HDFC Life Insurance in the large-cap space. What is your strategy for your large-cap fund? In the mid-cap space, The New India Assurance also got attention. Can these be the next Sensex stocks that investors can look at?
A) Large insurance companies have done well since listing, particularly the private ones. With the overall penetration still low and increasing regulations as well as rising disposable incomes acting as strong tailwinds, the longer-term opportunity in the insurance industry – both life and general – is very much there. In that sense, one may be surprised if a few of them don’t make it to the leading indices. While some of them are already potential candidates and could make their entry in the next six to twelve months, being recent listings, there is some time gap.
At a broader level, we are seeing the profit contribution of unlisted companies being higher than that of listed companies. We, as a country, need to find a way to incentivise these large unlisted companies with large profit pools (most are subsidiaries of large listed foreign companies) to list. For this, Indonesia recently came up with a five-year window of reduced taxes for new listings.
This, among similar such ways, could be a good way to get them listed, which increases their stickiness and presence in the country over the longer term, increases competition, allows Indian retail to participate in the value creation that is happening in India but is not part of the listed space. Like insurance companies, which got recently listed, some of these could also be large-value creators in the longer run.
Q) The macro data is getting worse by the quarter but benchmark indices are trading near record highs. Is it time to act on Warren Buffet advice and buy the ‘fear’ as small and midcaps are down 20% from their record highs?
A) While overall economic growth has slowed, we are still growing at over 5 percent. Inflation levels have seen a recent uptick more from the weather-related disturbances that led to food prices moving up (classic economics relationship of lower production). The good part is that the core inflation is still minimal and hence one can expect this headline number to come down as the season moves ahead.
Industrial activity indicators did see an impact of weak production and this at some level is a fallout of the industry clearing their inventory and the monsoons also impacting production as well as demand. The trade deficit, meanwhile, has held up pretty well and is showing relatively positive signs. What is also very noteworthy is that we have started to export electronic goods and import less of gold.
On the fiscal front, one is likely to feel the impact of the recent corporate tax cuts and the YTD below-target GST collections. The government is abreast of this issue and has already moved forward on the process of divestment of some large PSUs and this hopefully can help balance the fiscal math.
With some long pending cases in the IBC process seeing judgments announced, the resolution process can kick start and that is directionally positive. This, if it is helped by few more structural reforms being attempted in this winter session of Parliament (simplification of over 100 labour laws into four labour codes is a case in point), then we are moving in the right direction.
The markets are trading at 1.5 standard deviation above their long-term mean and to some extent are factoring these directionally positive moves and the recent tax cuts. Regarding small and mid-caps, we would not be looking at them at an index level. We look at them more on the bottom-up basis and some of the leading business franchises, within those indices, that are run by capable and competent managements are available at reasonable valuations and some of them do look attractive
Q) After Moody’s downgrade of India outlook and growth, all eyes are on GDP numbers. Do you think we will slip below 5 percent in the September quarter? Do you think the Street has factored in that number?
A) A below 5 percent GDP print looks difficult; even it does at the borderline, it is looking likely to be very transient, given all the above moves that the government has taken. Besides, even the global trade tensions are showing some signs of abating and that should also help our exports-focused sectors slowly.Q) Gold has been volatile, thanks to mixed signals on the trade war front and rupee depreciation? What are your views on the yellow metal and should I make use of corrections and buy?
A) While we do not understand much about gold, in some limited sense, we do notice that globally, one had in 9MCY19 seen small risk-off trade as well as a rally in the dollar index. These factors and the changes in customs duty on gold had led to a move in the local gold price being at a level higher than what one has seen globally.
With chances of possible trade tensions easing at the global level, we have seen some correction in gold from elevated levels. Difficult to call if one can see a further upmove from current levels. On the demand front, the swift move had some impact on jewellery consumption is what we gather from channel checks. With this correction, there is a possibility of some demand coming back. But for a sustained move, historically what we have seen is that whenever there is a lack of alternate investment avenues and prolonged uncertainty, we see chances of improved investment demand for gold.
Q) The rupee recently broke above Rs 72/dollar. What is the way ahead for the currency?
A) Currency on the REER (real effective exchange rate) basis is still a little overvalued. However, the trade deficit is largely under control and foreign investment flows have relatively held well. This has provided some support. While fiscal deficit math is looking a bit stretched and requires support from divestments, once that happens, we can see some more support.
Overall, we don’t see any major moves in a hurry on either side at this point. Over a one-two year period, we have seen that the currency moves – could be with some lead and lag – are more driven by interest rate differentials and that should hold.
Q) We are almost at the end of 2019. What stood out for markets during the year–the FM’s proactive reforms initiative or the Moody’s change in outlook for India?
A) In our annual outlook for 2019 at the start of the year, we outlined that H1 was likely to be a very macro volatile period and H2 being driven more by fundamentals at a micro-level. While the macro volatility has extended a little more, the markets are now increasingly being dictated by the bottom-up company earnings. Difficult to call one thing that stood out. At a broader level, we are seeing the structural reform path moving forward for the country and that augurs well.
Q) How can investors balance emotions and remain invested in testing times like the ones we have seen in 2019?
A) I think domestic investors have exhibited more maturity in this cycle by participating more through the institutional (passive route) mechanisms and they have continued their SIPs through varying levels of the markets (not playing it by momentum). These are healthy signs and point towards a build-up of a good domestic pool of capital to be accessed in the longer term.
(The author is Head–Equities at BNP Paribas Mutual Fund)
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