While the Indian equity market has discounted poor Q4 earnings, days of robust numbers are still far, says Krishna Kumar Karwa, managing director, Emkay Global Financial Services.
In an interview to CNBC-TV18, Karwa says the economy will see a turnaround only after 4-5 more quarters.
On sectoral bets, Karwa says public-sector banks are good long-term bets.
Below is the verbatim transcript of Krishna Kumar Karwa's interview with Reema Tendulkar & Sonia Shenoy on CNBC-TV18.Sonia: It has been good days for our markets. The month of May has been kind so far but what is the sense that you have made of the earnings season so far. The assessment is that it has not been what we were expecting earlier. Is that the feeling you are getting as well?A: As far as the earnings season is concerned, there has been a mixed bag kind of results. If you look at some of the Public Sector Undertaking (PSU) banks, they came out with numbers which were much better than expected and they have also seen the stock prices of some of the PSU banks performing accordingly. Then you have the IT companies, for them the results were broadly in line with expectations but maybe the stock prices had not reacted in advance and then they reacted post the numbers and now the IT stocks are also been at par.So, there have been pockets like you have seen in the FMCG companies also. So, numbers have been reasonably in line with expectations but the managements have been very cautious about the way forward and again that has been the case. As you said that the results season has been in track with the analyst's expectation and because of that the stock may have reacted based on the valuation you have at that point of time.
Reema: I was reading your report where you said that the context of widened gap between business cycle and market valuation will keep the market susceptible to negative triggers. Could you Walk us through the negative triggers as you see it because earnings has been mixed. It has not been worse than what the street was anticipating and how much downside is there for the markets now?A: As I said, what happens sometimes is that the expectations goes ahead of the curve and the valuations of the market accordingly are ahead of what the ground level or the basic fundamentals are. So, that is what we have tried to bring out in that research where we believe that markets have discounted the expected uptick in advance and we believe that the turnaround in the economy per se would take longer than expected.
Maybe it will be at least four to six quarters ahead of the curve. So, that is where the disconnect is. At the same time having said that, we still believe that global liquidity is not going to be the total capitulation as far as the markets are concerned. So, there could be sectoral shifts happening, which means that you believe that maybe the IT pharma defensives will continue to outperform and the infrastructure cap goods space which have probably run up in anticipation, may probably consolidate and then as things on the ground level starts improving, they should be in a position to come back.
Sonia: What is your recommendation to investors at this juncture? Is it still a market that one should be buying on every dips?A: Inherently, it depends upon the horizon that the investors have. As long as your horizon is long enough then we are in the midst of an uptake. However, in the immediate it is more of a consolidation kind of phase that we are going in. It would be best to be on the bottom of the investing style rather than a macro style.Reema: We have seen some good earnings in the likes of Britannia or a Voltas today. In the midcap spaces which were the earnings that you liked and in the recent past post the earnings you have changed your opinion on the stocks and recommended a buy?A: Midcap investing is all about bottoms of investing and as per regulation now we are not supposed to speak about individual stock but one thought which came to our mind is that for most of the PSU banks, the valuations are like midcap valuation. So, probably from a longer term perspective the whole PSU banks look like decent long-term investing opportunity.Apart from that I believe that quite a few Cement companies are in the mid market sector. If you believe then there is 2-3 year horizon, if you are positive and belive in the old domestic economy and the infrastructure space, then quite a few of them offer reasonable valuations and decent operating cash flow from a two year perspective. So these are some of the bottoms of investing ideas that we believe can offer you good returns.
Sonia: This government has made some concerted efforts towards solving the problems of coal supply etc. What is your view on how positive this proposed auction of coal linkages could be and the impact it could have on many of these unregulated sectors like cement, iron and steel etc?A: Government has been making concreted efforts to ease the whole resources issue in the last 12 months. It is again an extension of that process. Obviously this is going to be beneficial to the companies in terms of availability of linkages etc. However, the question is again these auctions, earlier also we have seen some of the coal auctions which took place at prices which were probably much higher than what had been envisaged. So, it is going to be a function of how efficiently various corporates bid for these coal linkage auction that is going to be the key issue.More than that as far as coal is concerned the challenge is lot about evacuation ability and that is where the major challenge is today, rather than on the coal mining itself. So that is where all the ministries will have to work in tandem to ensure that the coal reaches the end user finally.
Reema: Speaking about the government, there was a big hope trade and hope rally which took place exactly one year ago, when money went into the capital goods space over and above the traditional defensives like the IT and pharmaceutical sector. In the last few months we have seen pessimism kicking in, but investors seem to be a bit disillusioned with India’s rapid growth reforms story. What are your thoughts in the capital goods sector and how do you think these frontline capital goods will do in the next one year?A: As far as the capex cycle is concerned, we have not seen any major capex measures announced by the large corporates. So the corporates have still not started their investment cycle. So, the challenge is in terms of the order inflows as far as the cap goods companies are concerned. Initially the thought was that with an improved sentiment and business environment, corporates would start the capex cycle but the corporates are still struggling with their stretched balance sheet and they do not have the right debt equity balance to be able to start their capex cycle. So, yes, capital goods have run ahead of the curve and the order inflow generally does not seem to be supportive of the valuation. So you have seen some kind of moderation in the valuations of some of the capital goods companies.
Sonia: You have written in your note that one should avoid rural themes and that has been the over arching story in the last couple of weeks and months. With respect to the slowdown that we have had in the rural markets, what would you suggest avoiding, the two-wheelers names that are exposed there or many of the FMCG names that have not yet shown any slowdown in the rural markets at least?A: If there is a slowdown in the rural India then obviously the segment that you referred to which is the FMCG companies and also the two-wheelers would see some slowdown in sales. However, most corporates are not only exposed to the rural India but also to the Urban India. So we are possibly seeing some uptake in the consumption cycle of urban India. Two-wheeler per se, yes if there is decent monsoons in the rural India then there could be an uptake in consumption pattern and demand for the two-wheelers.As far as FMCG companies are concerned, they have also benefited from lower raw material prices so no doubt the overall volume growth have been more or less as per analyst expectation but the threat of a slowdown from the rural India could be a reason to worry.
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