Auto, bank earnings may get a boost in H2FY13: Nitin Rakesh

From a macro perspective, Nitin Rakesh, the chief executive officer of Motilal Oswal Asset Management finds that there are a couple of things that are happening globally. The Greek elections were a sigh of relief for the market.

He doesn’t see it as a sign of a resolution, but it’s at least a sigh of relief because you potentially have a leadership in Greece that will works towards the bailout. Secondly, he sees the G20 summit in Mexico breathing some positive life back into the markets because of the resolve that the leaders are showing.

Also Read: Midcap tigers to lie low till growth picks: Ajay Srivastava

However, he cautions that we need to wait for more specifics and see what the plan looks like. But most importantly, says Rakesh is the Fed meeting today and the clear expectation that has been built in, that they will extend some sort of quantitative support to the markets whether it is Operation Twist or something else of that nature.

“It looks like we are getting into a situation where at least for a period of time all maybe quiet at least from a global front from a negative newsflow perspective and if anything we may just get some support from policymakers,” adds Rakesh.

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: The current performance seems to promise neither the rally that people talked about at the start of this month nor the deep correction. Would you say that for the near-term we are probably relegated to a range again for the index?

A: Our base case scenario at this point is that the market actually has an upward bias purely because of the three things that were pulling the market down all through last year, the commodity cycle going against India, the whole currency impact that we had and the local interest rate scenario. Two out of those three things seem to be correcting, some on their own like commodities and oil, some because obviously we have peaked on the interest rate and the monetary cycle and we may not have seen any aggressive loosening, but we have already started to see things like liquidity infusion, we have had one round of interest rate cut, CRR cuts.

So the interest rates peak is behind us and the commodity cycle’s peak is behind us. The only thing left is currency and I think slowly as oil companies either stay at these levels or drift downwards which it has been doing, it definitely is looking like the base case is a positive bias. Now whether we will break into a sharp rally, I don’t think we are expecting that either, purely because there wasn’t really an earnings breakdown.

The earnings growth had slowed down. The last three years earnings growth, CAGR has been in single digits, but there wasn’t really a breakdown on earnings. So unless one sees acceleration in earnings beyond 10-12%, I don’t think you will see market's rallying up really that fast. Yes, there will be periods of sharp rallies with corrections, but I don’t think the expectation should be that you will see an abnormal rally in the market.

Q: How do you approach a space like cement this morning? It’s the first time this has happened. An entire conglomerate has been accused of cartelization and there could be some hefty penalties.

A: Clearly an interesting situation because it’s an unprecedented type of event even though we don’t know the names of the companies but the media report suggests that almost all the major players are in there. The price action on cement companies seems to have priced in what could be the penalty amount. If there is a kneejerk reaction and for the correction I think at least our parent house view is that it’s something that we should look at although on the AMC side we have still not aggressively looked at those names.

Q: There has been some sense of disappointment about the advance tax numbers this time though they are by no means a firm indication of the earnings to come. Last quarter earnings were mixed but they were not too bad. Do you think this quarter’s earnings will be worst than last quarter?

A: Definitely not. I think last quarter was probably I would say the bottom of the earnings cycle if anything. We already started seeing downgraded cycles barring one odd name here or there. Advance tax numbers are a very poor indicator especially in the first quarter of the financial year. So I wouldn’t read too much into that. Yes, it’s a data point, but that’s what it is and it’s not really an indicator of what earnings might be.

If you are looking at Sensex EPS growth of 10-12% this year I think we will probably continue to work towards that number all through the quarters. My sense is second half of the year we might actually get slightly better numbers as the interest rate cycle starts to kick in and boost earnings of the interest rate sensitive stocks things like autos, even banks for example. There was a big surprise from SBI last quarter. I think that’s an indication that we may have actually bottomed out on that front as well.

Q: Do you expect diesel prices to be touched at all in the next three to four weeks, because that would be a big trigger for the market?

A: We had talked about this when the petroleum prices were increased about a few weeks ago. Just to maintain the parity differential between diesel and petrol they were supposed to actually have bumped up diesel prices by the same percentage at least. So my expectation is as we get some clarity on who is going to come in to the Finance Ministry, there is potentially some decision likely to be taken. Falling crude prices will also give them some cushion as to how much they need to do on that front. But it’s not unreasonable to expect that you may see some policy action on the subsidies and on the oil front as well.

Q: On liquidity, you have an interesting ETF conversation and discussion going today. What is your observation in terms of whether the bulk of the money is still coming via this ETF route and whether that’s holding on for any of these Fed like events to invest into a market like India?

A: There was a slight uptake in Q1 of the current calendar year, but I don’t think we have seen any of that follow through since say the end of February. Clearly, we will get some more ideas when we talk to our experts later on today. Ideally one will see that kind of money flow in once the risk appetite goes up globally, once people start chasing performance and start chasing riskier assets. Even if you see the global ETF AUMs, they have been pretty stable from an India perspective.

Q: Do you see this CCI order on cement having any kind of repercussion on the market sentiment? People are talking about tyres being next on the radar of the CCI. Is there any kind of oppressive regulatory hangover which might spoil sentiment at all?

A: While the order is unprecedented and not many people had priced this into the situation, I don’t think there is any fear that the floodgates will open. Wherever there are such practices being adopted, those industries will come under the scanner and the market will keep trying to find out where that’s likely to happen and discount that before it happens. I don’t think it’s fair to assume there is going to be any panic around that.