Expect earnings cycle to improve in H2 FY17: Kotak Mahindra AMC

Though a forecast for good monsoon is being made, how it pans out will be crucial to earnings cycle in FY17, Nitin Jain, Principle Fund Manager at Kotak Mahindra AMC, told CNBC TV-18. He, however, said that he expects earnings cycle to pick up in the second half of the year. Good monsoon, monetary policy are key triggers to improvement in earnings cycle, he said.He said, that the impact of RBI's interest rate cut is yet to be seen and is one of the triggers that one should watch out for in the second half of the year.The company is positive on consumer durables, oil marketing companies and private banks, he said.Below is the verbatim transcript of Nitin Jain's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: We got an upgrade from Morgan Stanley and of course we also got better than expected results from the likes of Tata Steel, JSW Steel and more importantly Larsen and Toubro (L&T). Is the more turning, should we hear more upgrades from foreign funds?A: We have got big upgrade in the sense of monsoon before we get the upgrades from the market and that is driving the market. I think those are much more material and bigger events which we have waited for the last two years; two years of very bad monsoon. I think that is a big trigger and we keep hearing that monsoon is going to be better, so that is a big signal. Of course the slew of last few results, are also helpful to keep the momentum going. The earning cycle would be slow in the next quarter but will pickup in the second half of the year in a much more meaningful way.However, I am rephrasing that the big trigger on the upside is monsoon; monetary policy has been benign for a while. I think second half of this year could be looking very interesting. Sonia: What is the feedback that you are getting from a lot of the long only offshore funds, the other guys that you speak to? Has the mood improved a lot compared to what it was six months ago because so far we are seeing a lot of money coming from domestic institutions; foreign institutions have not participated as much this year but what is the sense you are getting?

A: Look at from a global investor perspective. He is getting a mixed signal of emerging markets. There is big worry on China which is still there. The commodity markets have been yo-yoing; iron ore went up to USD 70 and is back to sub-50 now. Oil prices are up but they are still at USD 50 per bbl. So from a global investor's perceptive emerging markets are giving mixed signals. In that mixed signal, India stands out because the big worry in India used to be corporate earnings and now the corporate earnings cycle is also looking to be bottoming out. So from a global investor perspective the allocation to emerging markets will remain a little muted, they will become more country specific and which is what we are seeing, also the domestic investors' side, interestingly in the month of March and April we saw outflows of money from domestic investors, when they typically get large inflows in insurance. Therefore, we are seeing that investors are taking a measured view of the equity markets. I would like to highlight that the February discounts sale in Indian equity market is over, so we are no longer on a valuation scenario which will make a global investors to put big amount of money in the market, so they will be measured and they are getting mixed signals on global markets. 

Latha: I was wondering whether our earnings are now justifying the valuations. Is there an earnings upside surprise for FY17after you looked at the Q4 numbers?

A: There are two parts to it. When you look at corporate profit as percentage of gross domestic product (GDP), we are at very suboptimal levels. So that reset is going to happen over the next two years as profitability improves. Therefore, in that count there is a going to be significant normalisation of PE multiple as the earning starts showing through, of course in the second half of this year, it could be significantly better than what we expect as of now but we will have to take it as it comes because when you look at the rural market, the rural GDP estimate for this year is still low single digits. If there is indeed a good monsoon then the delta in rural GDP could be very large. In the second half of this year we should also see the Pay Commission related positive things for consumer sector. We have had 150 bps of rate cut and that rate cut is yet not seen any impact in the market. I think we will see that impact coming through. So there are some things which are lined up in second half which could be materially positive from earnings perspective. Of course there are large chunky earnings of banking system, which needs to be washed out. Now whether there is going to be still more pain in Q1-Q2 and Q3-Q4 could be significantly better, it is possible but that is one area that one has to keep watching out for.

Sonia: Where you would put some incremental money now in terms of sectors?