See FY16-17 growth forecast revised lower: Religare Invesco

Below is the verbatim transcript of Vetri Subramaniam’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Sonia: The market has been very volatile of-late. What do you think has been worrying the market the most?

A: The only think I disagree with is I am not sure I would call the market as being particularly volatile. It certainly perhaps, looked up marginally compared to the lows that we saw for volatility maybe last year. But this is pretty much within the normal range of volatility for the Indian market. If you look at the volatility of Indian market over the longer-term, whether 10-15 years then these are not particularly volatile or exceptional times. The whole trading range for the market this year is 15 percent which is not very abnormal for India going by past history. But, clearly there is a lot more global news flow and each of that is having an impact on India as well, but we are not really isolated as an island. So, I think that is par for the course.

Latha: Bihar election, the one that is on our head. Is it really that big a trigger or are we making too much of it?

A: My experience over the years is every time there is any big state election, people always tend to play it up in terms of being a referendum on the mood of the electorate and having a very significant outcome on policy making by the government. But given the number of states we have in India, it is very likely that there will be three or four big state elections every year and both the politicians and market need to learn to live with that.

So, there has been some sort of talk about the implications of the Bihar elections on policy making, but to be honest, I am not sure it really makes that big a difference.

Sonia: Let us talk about some sectors. You are overweight on the auto sector in all the funds that you named. So, names like Maruti Suzuki, Hero Motocorp, etc. What makes you so bullish?

A: Let us just step back one level before the auto space and essentially look at it from the point of view that when you look at the Indian corporate profitability, there are several reasons to believe that right now it is depressed compared to typical trends that we have seen in the past and therefore, at some point during the recovery in the economy, we do think that cyclical companies can see slightly stronger profit growth. In that context, we think the auto companies are quite well placed. Essentially, they have got the tailwind of lower raw material prices, though I do not think that is necessarily fully sustainable, but they have also got the benefit that lower fuel prices means that it is easier for consumers to justify buying a high ticket consumer durable like autos. And interest rates are also coming down which if anything on margin, is supportive for the purchase of automobiles.

So, I think just in the cyclical domain, this is one area where we think the company’s fundamentals are pretty strong. The possible outlook in terms of demand recovery is supportive and valuations are not cheap but they are reasonable. So, that is what within the cyclical domain makes this for us a very preferred area to invest in._PAGEBREAK_

Latha: On earnings, is the worst out in terms of earnings downgrades or do you think this season also is going to be more downgrades than upgrades?

A: The earnings are clearly trending lower unfortunately but I would say again this was expected. However, if you see from the time the earnings seasons started, earnings have been cut by almost 100 basis points even from broader indices like the Bombay Stock Exchange (BSE) 100 with about maybe a third of the companies reporting. So, the trend overall is in terms of earnings cuts, but I would say it has not really been an extremely disappointing earnings season because perhaps analysts have caught up with the sort of trend in earnings movement.

However, you will most probably see that by the time the earnings seasons gets over, there will be further cuts to both FY16 growth estimates and also FY17 growth estimates because I still see that a lot of the FY17 growth estimates are still very aggressive and they appear to be based on the fact that people had already factored in a strong recovery in FY16 and as we are already in the second half of the year and the outlook for FY16 remains challenging, eventually, even the FY17 earnings growth might start to get questioned a little.

But the bigger challenge is just that as of now, we just are not seeing enough momentum across a broad range of sectors in terms of earnings growth both because domestic demand is weak as well as external demand has turned weak. So, sometime in 2014-2015, we at least had a lot of companies which were servicing overseas markets showing strong earnings trajectory. Right now, even that has gone missing for a variety of reasons. So, we are still in a challenging period for earnings estimates.

Sonia: Let us talk about some stocks then. Axis Bank - are you worried now and will you be trimming exposure or will you be accumulating at this point?

A: We do no comment on specific stocks or actions, but just looking at the big picture, the takeaway everybody should have from the kind of results they have reported, was really more to do with the kind of haircut which was required to be taken on those loans. And when we talk about stressed assets in the Indian banking sector, we need to keep in mind that it is not just a question of recognising the stress, which would mean a small provision in your profit and loss (P&L) account because you have recognised it as non-performing asset (NPA), but more importantly to make some of these assets full and in order for them to being viable concerns going ahead. however, significant haircuts will be required to be taken on the loans as this particular example shows as well as some of the previous examples we have where companies have actually sold those assets down to asset reconstruction companies (ARCs) and my concern across the banking sector remains that no everybody has actually taken the kind of haircuts that are required on those loans.

Therefore, institutions which do not have either the requisite level of pre-provisioning profitability or capital adequacy will find it even more difficult to recognise these hits as they come along. So, it raises sector wide issues but I cannot comment specifically on Axis Bank itself.

Latha: Let me take the sector question then. Will you be trimming generally your exposure to private banks, especially those with exposure to infrastructure, cyclical?

A: I think we are quite happy with the kind of portfolio structure we have at this point of time and I think one of the things that we have always laid great emphasis on is on being invested in financials where the liability franchise is extremely strong and at least where we have full transparency and visibility of the asset side in terms of the quantum of problem assets and how the bank will be able to absorb the hit as it comes through from those troubled assets. So, that is a continuing sort of approach that we would have and we are reasonably comfortable with our exposures the way we are but these things are things that we review as and when we get a new piece of information and we will continue to do that.

Sonia: What is driving your underweight call on the fast-moving consumer goods (FMCG) and the energy stocks considering that some of these stocks have done well?

A: On FMCG, the issues primarily got to do with valuations. We just find valuations over there way too rich. No doubt, they are still managing to churn out some earnings growth which looks pretty good in light of the fact that you have got earnings cuts coming through everywhere and you have got very weak corporate earnings growth, but the fact of the matter remains that all of that is already discounted in valuations which are extremely high and do not leave any sort of – forget margin of safety – they just do not give us any comfort whatsoever. So, I would say FMCG, it is predominantly a concern on valuations.

On energy, actually, the companies are very distinct and diverse from each other in terms of what drives their profitability. So, there are some companies where we have significant underweight positions, but equally there are some energy companies where we are significantly overweight. It is just the fact that there are different business models there, there is upstream, there is downstream and therefore you have got to treat each of these very differently. Typically, we have tended to be a lot more overweight on the downstream, refining and marketing names more because of their marketing businesses and we are overweight in that part of the energy sector.

Latha: Let me come to India’s relative valuation. Do you think this relative premium that we have enjoyed needs to be trimmed and will be trimmed?

A: You have got to look at different issues. You can look at how we are trading relative to other regions. You can also look at how we are trading relative to our own history and I would tend to place more emphasis on the latter in terms of how we are trading relative to our own history. And relative to our own history, we are not trading particularly cheap. I think on a trailing basis, the market, as in the Sensex is now trading close to about 18-19 percent premium to its long-term average which is not particularly cheap in that sense. So, there are issues in terms of market valuations.

I think a lot of people recognise that India is in a good spot, it is in a sweet spot, if you want to use that word. And it is because the macroeconomic fundamentals are quite positive, but then that is already reflected in the valuations. So, then you have got to be a little bit more cautious in terms of how you go about arranging your portfolio, because if that is already in the price, then what are you paying for and what are you hoping to get over and above what is already visible?

So, in that sense, valuations continue to remain a bit of a challenge for India at this point of time. In terms of what happens to valuations, history is fairly clear that valuations fluctuate, valuations tend to mean-revert. We were as high as 30 percent premium at the start of this year; the premium has come off a bit. But it has not yet dropped down to what we would call a comfort zone which is plus or minus 10 percent of the long-term average. So, from a valuation perspective, we are not really in an attractive territory at this point.