The commodity prices have started to rally, says Dhananjay Sinha Of Emkay Global Financial Services. This will be critical for earnings this year. The US presidential elections are going to be key in deciding where earnings head from here.He is skeptical about earnings this year saying the estimate of significant earnings rebound in the second half is very risky. He sees an earnings downgrade this fiscal.Also, US GDP numbers have also come in strong. This signifies that a US Federal Reserve rate hike is definitely on the cards.Below is the verbatim transcript of Dhananjay Sinha’s interview to Ekta Batra & Prashant Nair on CNBC-TV18. Prashant: Let us start with earnings that you have seen so far and any work in terms of compiling the earnings we have got in the second quarter and how do they look? How are earnings tracking against expectations so far?
A: With respect to the earnings, the estimate on consensus basis was somewhere around 15-18 percent for FY17 and FY18 as well. If you look at the numbers as they have panned out, the fourth quarter of FY16 was a positive surprise because of the margin expansion that we saw and that was a lagged effect of low commodity prices during that quarter. But, in the following two quarters it has actually dissipated where margin benefits were coming off and as we look at it in the second quarter, for the results that had been announced, it does appear to be in the region of 5-8 percent as of now. In the previous quarter, it was close to zero. So on an average, it is somewhere around 4 percent or so.
So, if one has to attain the 15-18 percent growth that consensus is assuming then there has to be a significant rebound in the second half of the year which is a risk from a projection standpoint. So, we had held a view y about 8 months back that while there might be an improvement in FY17, it might be somewhere in the region of 5-10 percent. So, I would say eventually, it will be around there, so there has to be some downgrade as far as earnings are concerned and we will see subsequently how it pans out. So, that is the expectations as far as earnings are concerned.
Ekta: In terms of a decisive move for the Nifty, what would be the key trigger according to you?
A: The rebound that we are seeing since February is largely on account of global liquidity and rates announcements by which central banks. So, that is a very critical thing and people believed that liquidity will still be there. Globally hence, emerging markets and developed markets have actually gone up quite sharply and that is also seen across bond markets, across emerging markets, etc. So, that has been a factor. Going forward, I would say there are a couple of things that you would like to highlight and we are tracking closely is, one, with respect to the US, the US election will be very critical and that is creating certain amount of uncertainty.
Second, the US gross domestic product (GDP) growth has been pretty strong for the second quarter. It has been in the region of about 2.8 percent or so. So, that has fortified the view that rate hikes will happen and that is reflected in US treasury yield gong up to something like 190 or thereabouts and it was at a low of about 130 about a few months back. So, that is a global aspect. Third, the commodity prices have started to rally and that will be very critical for our market and earnings in general.
Therefore, we are thinking that there will be a pipeline inflation that will build up. So, a set of a benign view that people have considered for inflation, that we are expecting will revisit and we are already seeing that in the wholesale price index (WPI) inflation and with time it will start reflecting on consumer price index (CPI). So, this whole view on Reserve Bank of India (RBI) cutting rates, etc. might be questioned at some point of time. So, there will be an increase in Indian government security (G-sec) yields as well and there will be a whole host of play that will happen with respect to the market and stocks and sector in general.
Prashant: Maybe it is too early, maybe closer to finish line, people will start talking about full-year earnings estimates and how they will be likely changed. But you said that significant rebound in the second half is unlikely. H1 is about 4 percent. Full year expectations are 15 percent to 18 percent. So, it seems that that estimate will be at risk. Do you think that in itself can spark a bit of a sell-off closer to the finish line?
A: There are two things out here and these are contrarian things that might happen. One, you will have, from a market standpoint, the increase in commodity prices; at an initial level it is positive because it implies that topline growth with some sectors will start rebounding and remember, since 2015, end of 2014, we were of the view that decrease in commodity prices will be adverse for earnings growth for Indian growth in general. So, the initial part of it is somewhat positive.
However, on the other hand, the fact that global markets have already gone up in Indian markets also rallied accordingly. The fact that there will be earnings cut would also suppress multiples for some sectors and stocks. So it is going to be a mixed bag wherein some part of the cyclical may look positive and there are several stocks and sectors which are depressed at this point of time and there is value there whereas in some areas it might actually become somewhat challenging. So, I would say it is going to be a mixed thing. So, from a market standpoint, I would say that it is likely to be a range bound market wherein at different points of time the momentum will be challenged.
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