GST rollout & bank NPAs biggest market triggers: Emkay Global

Global events like the US Presidential elections and Federal Reserve rate hike are important for foreign inflows and the effect lasts for 2-3 days, says Krishna Kumar Karwa, Managing Director and Chief Financial Officer Of Emkay Global Financial Services.But he says what matters the most are local factors for the market with recent rise in local inflows into the market. In the long-term, he sees the banks' non-performing assets' (NPA) situation and the implementation of the Goods and Services Tax as the biggest long-term triggers for the market.The Indian economy may have improved considerably following a good monsoon, but Karwa says the earnings may only improve in the second half of current fiscal and will hold strong till the end of FY18.The market is in a consolidation phase as it has already run ahead of company earnings, says Karwa.He is positive on branded retail companies and the two-wheeler space. He adds that the telecom sector could bottom out in the next 6-9 months.Below is the verbatim transcript of Krishna Kumar Karwa’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: Yesterday’s bank earnings, especially Axis Bank, is that making you rethink about economy growth and earnings growth at all? A: Not exactly. The indications were always there about the watch list, etc and it is just about the management probably accepting the fact that things are not turning around as fast or as quickly as possible. Some of the other banks have been ahead of the curve in terms of acknowledging the situation and providing for. However, if you look at it, the stock was under pressure for almost a month and so it kind of confirms the market expectations. So, to that extent, I don’t think that we should be taking too much of a cognizance of this event to reflect for the whole banking sector. Let us put it the other way round that two weeks ago there was this big asset sale by one of the private companies and that has impacted positively the expectations on the other private corporate banks. So, I would take it that way. Sonia: What would your strategy be on the banks because on one hand you have Axis Bank where there is no clarity on when the NPA issues will get resolved and on the other hand you have something like ICICI Bank, what would your view be? A: There is a definite trend that corporate banks, the situation is improving. So, you should be looking to invest in corporate banks. Obviously the consumer banks have always done well but there are early signals that things are improving, valuations are reasonable, so, whether it is ICICI or Axis, at a particular valuation, both would be attractive investments. The very fact that kind of heavy provisioning has been done in Axis Bank so it is a question of time and the valuations are or rather the stock prices have come down. So, at a particular level, again it would attract investor interest. It is just a question of few quarters. Latha: Generally what is the outlook you have on earnings itself having seen probably 30 percent of the earnings season so far? A: If you look at the results so far and the stock price movement, most of the times if you see that wherever there were poor earnings expectations, the stocks have not exactly even reacted aggressively to them. So, the kind of earnings, most of the earnings seems to be discounted. You had fears that IT companies would definitely show a slowdown and the results came in-line and the stock prices have also not reacted very aggressively. So, my sense is that the earnings expectations, there are not too high earnings expectations generally across the board; people are expecting that the second half of the year would be better and maybe FY18 would be much superior. So, overall, I think the results are in in-line with the trend except barring a few expectations and there also I would say that maybe the stock prices ran ahead. So, you had some of the tile majors where there was a correction of almost 10-15 percent but if you look at it, the stock had itself run up by 15 percent in the last one month and there was no reason for that and now again it has gone back to its normal level. Sonia: I wanted to ask you on Arvind because that was the big deal of yesterday and I did notice that your team put out a note this morning as well. What is your view on the branded retail business and how some of these companies are sort of coming off age, moving away from that traditional model of denims and now going to sort of the branded retail business, do you see more scope here? A: We are positive on the sector per se and as growing consumerism and as you see that more and more middle class aspirations as far as the branded products are concerned, so, yes, these businesses are very difficult to establish and now many of these companies which are into branded retail have reached an ‘x’ critical size. So, going forward in the next three to four years, as things improve in the domestic economy and the middle class aspirations are fulfilled, you will see improving profitability of many of these branded retail companies and which is reflected in what valuations we were ascribing versus the valuations at which the private equity transaction happened at almost 25-30 percent higher than what analysts community was ascribing to that. So, we are very positive on the whole space from a next two to three year perspective. Latha: Generally what is the cue on markets, while we have not been able to climb to even 9,000, it was so widely expected about 12 weeks back that 9,000 is around the corner and it has remained an aspiration and at the same time to be fair we have not broken 8,550 as well. So, does it look that the downside as well is protected? A: Certainly. If you look at, there are two parts to it. One is the local expectations and the other is global expectations. If you look at, locally things are improving but it is taking to time to reflect in the earnings per se and maybe markets have run ahead of the actual earnings and that is why we are in kind of a consolidation kind of a phase from a local perspective. Also, you have global challenges in the next few months in terms of how the US elections pan out and positives and negatives from that or you have the US Fed rate hike and its possible impact the US dollar and how that impacts the floor. So, the fact is that, yes, we are in this range and again if you look at the Nifty itself that you have IT as a very big component over there and there you have a major challenge in terms of the earnings growth. So, the aggregate numbers don’t add up and that is what is possibly reflecting in a very consolidating kind of a moment in the Nifty itself. However, bottom-up, things are stock specific, sector specific as usual. Sonia: I was going through your note in which you do give out some potential result positives and one amongst that is Maruti Suzuki. Inclemently Maruti is today at a fresh lifetime high, it has hit a new level and it is gaining with more strength of Rs 5,800 and the results come out tomorrow. How optimistic are you on the sector as a whole and Maruti included? A: We have been positive on the two wheeler and four wheeler sector for some time. It is a direct play on the domestic consumption story and I think what constraints today that company is probably lack of capacities. So once things improve on the capacities front and then it could possibly see -- also I think if you have seen the valuations, the discounting, market is willing to give much superior discounting to the auto majors than what traditionally we have given. So, we continue to remain positive on the four wheeler passenger vehicle space. Actually there is no other play effectively so that is why there is a premium valuation that this company attracts and also we are positive on the two wheeler space and volume growth has been decent and going forward we expect that as rural India picks up then some of the two wheeler companies should get the benefit of that. I think it is going to be very important to see how the secondary sales pan out in the next few months because lot of dealer inventory filling has happened in the last few months. So, what is going to be important is -- and early indications are that things are good. Latha: What will be the leaders of this rally, Reliance Industries we thought would be the leader but after the results it didn’t do much, ICICI Bank was providing, today it has perhaps bearing some damage from the Axis numbers. What will be the leaders of this rally? A: My sense is that the oil and gas majors should be the leader because there huge amount of investments have happened in that sector and going forward the earnings should come out firm. So, that should be and last four to five years the stock has been in consolidation so that should one segment. Even corporate banks, there are early signs of improvement in the corporate banks sector and so that should also and valuations are reasonable so the thing is that until and unless you have valuations in your favour, investors cannot make good returns over a period of time. So, two to three things have to work. One is valuations and second is the fundamentals itself. So, I think both the things are possibly working for these two sectors. A dark horse could be telecom. I think in the next six to nine months it should bottom out. Sonia: Within that space, with Bharti Airtel there is still some more revenue visibility but even with a company like Idea Cellular? A: You look at it this way that what is the enterprise value of Idea? Rs 70,000-80,000 crore. How much has Reliance Jio invested to setup the business? So, there is a huge gap. They may have to do more investment, so, there is a kind of a benchmark has been set as far as valuations as well as what kind of investment is required to enter this sector now. So, versus that Idea is very -- I am not saying you go and buy, what I am saying is that valuations have possibly reached a bottom level. Latha: One place where valuations have reached a top level probably is NBFCs. You are an insider in that sector to some extent. How would you rate, is there still value to be found or is it now – gloom level or boom level? A: If you have seen, whichever sector attracts too much of liquidity, too much of capital, on a top-down basis there is huge amount of opportunity for all segments of the NBFCs and that is the reason why they are attracting huge amount of capital and the valuations also are reflecting that. However, what happens over there is that there will be some companies which will go overboard in terms of trying to show growth without having the right risk management. Whenever that happens -- and in NBFCs it is not the first few years you realize that, it is back ended. So, in the next three to four years will there be a bubble and will there be some collapse over there? It is certainly going to be there. However, currently I don’t think we have reached that stage. So, I am positive but at the same time I am giving my precautionary view as well. Sonia: This is an interesting question that we got on Twitter the other day. Everyone is looking for the next big trigger for the market so somebody asked us, if Hillary Clinton wins the US elections and if BJP wins the UP elections do you think that the market is set for a big upside? What would your view be? A: As far as these global events are concerned, I think they have a pop up or pop down for maybe two to three days and then we have to finally look at our local factors. Global events were important when you were totally depending upon global liquidity flows to drive your markets. Fortunately for us in the last 24 months if you see, the local flows have become very robust and with improving local fundamentals. So, I would imagine that the local factors are much more important and I would give more credence to local factors. As far as the election part is concerned in the UP, more than that I would say that how the local economy improves, domestic economy improves and the implementation of GST, etc and the improving asset qualities of banks, those are going to be the more important triggers as far as the markets are concerned. From a sentiment perspective, UP elections victory is always very good.