Won't see many downgrades as expectations muted: iPru AMC

The stock market is unlikely to witness too many earnings downgrades from hereon as it is going into the second quarter earnings with muted expectations, says Manish Gunwani, senior fund manager with ICICI Prudential Asset Management Company.

In an interview with CNBC-TV18, Gunwani outlined his views on a number of sectors, saying that while IT was unlikely to see a healthy growth in coming quarters, banking would be an interesting space to look into in the medium to long term.

"Consumer stocks are less leveraged in comparison to other stocks," he said, adding that he expects urban consumption to rebound in the short term. "But I will also be closely tracking results of cyclical stocks."Below is the transcript of Manish Gunwani’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: Today morning we got some positive newsflow that we have seen flows back into emerging market (EM) funds for the first time in many weeks and there is a chunk of that come into India as well. Do you think the foreign institutional investor (FII) sentiment is now getting a bit better than what it was about two to three months ago or is there still some amount of aversion towards India?A: It is not only about India. If you see over last couple of weeks what has happened is almost all the emerging market currencies have rebounded quite sharply. There has definitely been a change in sentiment towards EM per se. India is just a part of that basket. So, definitely what will happen is if this recent configuration of dollar weakness and EM currency rebound continues, you should see flows into India continue and that will obviously support the market.Latha: What is the overall sentiment on corporate numbers itself? There is not enough for you to react on but is there a feeling that we are going to see fewer downgrades? We have got some positive index of industrial production (IIP) number. Yesterday the non-oil, non-gold imports actually improved. Your thoughts, would the earning season throw up negatives or slightly less negatives than you thought?A: If you look at economy per se, we are definitely seeing a very mixed picture in terms of these kind of high frequency indicators you mentioned. For example indirect taxes, airline passenger, petro product consumption -- if you see these trends there has been a positive. There are some other trends which are not so positive right now. So, they are throwing up a very mixed picture.As far as earnings is concerned, I don't think there will be too much of downgrades because the expectations are fairly low. Basically if you see at least the headline index constituents -- most of the very cyclical components like metals, commodities etc obviously has a consequence of commodity prices going down. Those earnings have been marked to a very low base.On a marketcap weighted bases these private retail banks, IT, fast-moving consumer goods (FMCG) and pharmaceutical they constitute such a big part of the Index. There, honestly, there is not too much scope of earnings going wrong. So, to that extent, I would think that the worst of the downgrades are over but the tricky part today is obviously whether the cyclical re-bound will come back; not only from a valuation normalistaion basis but also from an earnings growth basis.If you see over last four-five years we have kept getting these rallies in emerging markets and as a consequence in India where the cyclical rebound. However, after two or three quarters when the earnings don’t come through again the IT, pharma, FMCG kind of sectors start dominating the market. So, the tricky part today is to judge whether finally we have seen the earnings of the cyclical part come back.Sonia: You have Infosys in many of your funds that you manage. What did you make of the earnings of the two big ones we saw this time so far Infosys and Tata Consultancy Services (TCS)? Given that the second half outlook is muted from the managements themselves, do you get a sense that we could now see some amount of underperformance from IT?A: Without reference to any particular stock; let me just talk about the sector itself. Now obviously it is a sector which is very large today. IT exports of the order of USD 80-100 billion. So, it is not a sector we think will grow gangbuster in the sense we don’t think it will be exclusive growth in this sector.Obviously lot of these stocks are very big part of the indices and given our size we will obviously tend to have large positions because we have lot of benchmark oriented funds. However, there is obviously a value out there also in the sense that this is sector, which has high return on equity (ROE), high cash flow kind of paradigms. So, to that extent it is just a value versus growth trade off._PAGEBREAK_Sonia: One of the stocks that you have in your portfolio is DCB Bank and the last three or four days have been very tumultuous for that stock. That stock is now up about 4.5 percent after the company scaled back its expansion plans. As a long-term investor in this stock how do you react to all this newsflow?A: Unfortunately we can’t talk about a specific stock so you will have to let me go on that.Sonia: Some of these smaller banks, there is a struggle for survival with the onset of payment banks coming through. So, do you get a sense that at least they could now become underperformers because of so much competition?A: It will be bank specific but in general, I agree that there is a potential wave of disruption that can happen in banking. It may not be very acute as in some of the other technology intensive areas. Apart from payment banks that you mentioned, it is also about the whole digitalisation phase of that industry. The moot point there is whether economies of scale will start to matter in that industry in the sense that whether the large guys can invest more in technology so that the geographic reach which was such a big USPs of these smaller banks that has impacted to a certain degree.If that happens then obviously people will have to question whether these regional banks they can grow secularly. Like lot of them if you see over last 20-25 years have been secular compounders. We will have to question ourselves whether that phase will continue or not?Latha: I won't know the answer. The question is there on the table. Current and saving account (CASA) as a way of growing is over for all banks. It was over for banks all over the world. My point is you forget the ICICI Bank and HDFC Bank but the entire set of midcap banks, even their liability franchise will get challenged by the small banks. In Bangalore region two-three people have got small banks licences. Janalakshmi Financial Services got, Equitas Holdings has got, they will also snatch away borrowers and then the payment banks takeaway your easy money. Midcap banks generally will you buy?A: That is what I am saying. After a long time, banking traditionally is seen as a very static industry but today as a mix of technology and regulation, you are probably entering a phase where a lot of these pillars on which the business model was built, like CASA, will get more challenging. You also have to wonder whether the share of top five will go up or down because as I said, with digitalisastion their ability to reach remote corners goes up a lot. So it is going to be very interesting space.Sonia: Another space that I wanted to talk to you about was the consumption story. One of the stocks that you own in your portfolio is Bata India Ltd and you know many of these consumption stocks have fallen 15-20 percent this year already perhaps because of no recovery seen in demand. Are you getting a sense that that could be the trend for the quarters to come or is there some bottoming out that you are seeing in consumption?A: I will not reference it to a particular stock but I think urban consumption also has been very patchy. You have seen lot of these retailing stories both domestic and international formats running here where the same-store-sales growth (SSSG) has disappointed but overall we think urban consumption will rebound.We are quite positive on the thesis that urban consumption will come back because -- I have mentioned before -- if you see this economy in three parts, government, private sector and consumer; the best balance sheet is still with the consumer. The government is on a fiscal consolidation path; the private sector, the capital expenditure (Capex) is intensive part of that, private sector is still very leveraged.However, if you see the consumer and you see the balance sheet size of its real estate and gold holdings, they may nor appreciate too much but the stock is so high versus the debt because unlike in many countries, our consumers are not very leveraged and we obviously have some triggers in terms of pay commission etc also coming forward.Latha: So which kind of urban consumption stocks should one invest in?A: You have restaurants, speciality retailers, autos, so you have a wide variety out there.Latha: Banks itself, you said that you do not see the top five challenged. Do you think that therefore you will invest more in them because they will be the beneficiaries of the disruption?A: That was a possible hypothesis but you have to be very objective and see how it goes because see these payment banks and these smaller banks, whether they take away CASA from the larger banks, that is also possible, although it will not be felt in the first 3-4 years. All I am saying is let us say someone was getting value for just owning a banking licence, those days are gone.