Sanjay Sinha of Citrus Advisors says maintaining this optimism will become difficult in the absence of earnings pickup
Investors have been rather patient with the slow pace of earnings recovery, but Sanjay Sinha of Citrus Advisors expects to see a pickup in earnings only in the third quarter. Based on that, he says a rally is not very far now.
According to him, if not in Q3, earnings momentum will surely make a comeback in the fourth quarter.
But between now and the third quarter, there are quite a few events that the market is worried about — US Federal Reserve rate hike and the outcome of Bihar elections, he says.
Sinha is also guarded about the outlook of commodity prices. The RBI lowered rates by 50 basis points partly betting on commodity prices remaining soft, he explains.
Below is the verbatim transcript of Sanjay Sinha’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Anuj: Still a good time to buy or would you now wait for a bit of a correction after the kind of bounce that we have seen in the market from 7,500 all the way up to 8,200 now?
A: I would say, that would be a function of a time horizon that you have. In my own opinion, the rally is now not very far away because this is the crucial quarter before we will start re-visiting many of the earnings estimate. We have been quite patient with the way earnings have improved.
However, the optimistic estimate is that from the third quarter of the financial year 2016, the earnings will start looking up otherwise it will be very difficult to even maintain a respectable single digit earnings growth in FY16. If that has to happen the market rally is not going to wait for the quarterly results. The rally will begin taking shape before that. So, therefore that doesn’t leave us too much of a room in terms of time before which the rally shapes up.
However, between now and say the next couple of months we have a few events which the market is worried about. One of them is this impending Fed rate hike and how the global markets particularly the global financial markets are going to react to that Fed rate hike. There is also a doubt about the outcome of the Bihar election and whether that will be taken as a referendum for the government and so on and so forth.
So, given that these two misgivings will be out of the way by the end of the calendar year we should have a strong rally now begin to shape up in the expectation on an optimistic note that the quarterly earnings from the third quarter will begin to shape up. On a base case, scenario that even if it doesn’t happen from the third quarter of the financial year 2016 it will surely begin to pick up from fourth quarter of FY16.
Ekta: We have seen a good rally which has come into the entire metal space this week. Vedanta for example is higher by 10 percent in todays trading session itself. Your sense in terms of whether now has come an inflection point where maybe the metal stocks could recoup some of the lost gains?
A: I am still a little guarded about the outlook on commodity prices because if you have seen the International Monetary Fund (IMF) world growth projections if you see the projections for China, China’s gross domestic products (GDP) growth rate is supposed to come down from 7.3 percent in calendar year 2014 to as low as 6.3 percent in the calendar year 2016. So that is a very sharp deceleration of one of the largest consumer of commodities. In that background I would not be very bullish on the commodity prices.
In fact I also have I also have a view that one of the things that prompted Reserve Bank of India (RBI) to cut the rate by 50 basis points came from the confidence that it had that they would not beat too much of an upward pressure on inflation in the background that the commodity prices would be soft. So, at best the rally that we are seeing in the metal stocks could also be inspired by the fact that the brent prices have appreciated over the last 10-15 days.People are expecting that to be extrapolated to commodity prices particularly metal prices. My personal view is not so bullish.
Anuj: What about the banks, especially the ones where we have seen a big rally today, the likes of ICICI Bank and even maybe State Bank of India (SBI)?
A: On that, I have a view that the government actually is going to do something very radical as far as the banking sector is concerned. And there if you see, we have a very paradoxical situation where the private sector banks are growing their credit books at the rate of 15-18 percent per annum and the public sector undertaking (PSU) banks are between 7-9 percent per annum.
One of the things which is today acting as a big burden for the PSU banks is this huge burden of non-performing assets (NPA). If you look at a second level screening of the NPAs, not all these NPAs accumulated in the books of PSU banks because of procedural lapses. Some of them are also because of the macro economic outlook. We are aware that a large chunk of the NPAS are ascribable to the metals and mining sector and infrastructure. Now, these sectors are labouring against the weight of whatever is happening in the macro environment. So, even going forward, I do not see the ability of the PSU banks to be able to convert these NPAs into performing assets in the short-term.
So, one step which I saw the government taking was to take some of the burden off the banks by trying to address the exposure to the distribution companies exposure for nine states. Way back in 2001, there was a similar issue which came in the case of Unit Trust of India (UTI) where the markets had fallen and they had a huge asset base on which they had an assured return to be given. So, what did the government do in that case? They created a special purpose vehicle (SPV) and they passed these assets there. Once the market revived, these assets gave back much more than what the government had committed.
I think there is a need for a similar mechanism to be put in place for the NPAs of banks and more particularly, in the case of PSU banks. If that happens, that is going to be one of the key foundations of the rally that we are going to see because if we have 30 percent weight of the larger indices to the banking and financial sector, you need that sector to be performing for the market as a whole to perform.