Margin pressure across most sectors, given the high prices of raw material, is likely to impact companies' profitability in the second quarter of FY19, said Rohit Singhania, Co-Head Equities, DSP Mutual Fund.
In a freewheeling chat with Moneycontrol, Singhania said there may be earnings downgrades for the broader market during the earnings season.
A slew of events, both at home and abroad, could overshadow equity fundamentals and keep Indian stocks volatile over the next six months, he said.
However, Singhania feels the information technology sector may outperform the market as the rupee is not likely to reverse its losses quickly on a year-to-date basis amid global uncertainty.
He said DSP Mutual Fund is also positive on large-sized corporate lenders and banks that have a strong CASA (current account savings account) franchisee, but is underweight on the consumer discretionary, consumer staples and telecom sectors.
The fund house currently holds cash levels of 4-5 percent in its equity portfolio. Singhania’s advice to investors is: "Don't try to time markets; no one can predict bottom or high. SIP is the best approach."
DSP Mutual Fund, the ninth largest fund house in the country, managed average assets under management of Rs 95,457 crore as at the end of September.
Edited excerpts...
Q: How should investors read into the challenging macroeconomic situation, which has gone from good to bad, and now slightly worse?
A: Macros have a direct impact on liquidity and interest rates and thus growth in the medium to long-term. Higher oil prices and protectionism in developed world led to increasing CAD (current account deficit). Rising UST (US treasury) yield and DXY (US Dollar Index) led to FII outflow from EMs (emerging markets) including India (around US$11 billion in 2018). This has resulted in the rupee depreciating close to 14 percent YTD and a correction in the equity market.
Q: How do you think earnings season will pan out? So far, the results have been mixed
A: We expect margin pressure across most sectors due to high raw material costs and this would impact profitability in Q2FY19. We are likely to see earnings downgrades for the broader market during the earnings season. The key would be to understand from management, their ability and confidence to pass on cost increases. Exporters would have some relief on margins due to a weak rupee, companies with big foreign debt component could see some deterioration in balance sheet ratios.
Q: We are now in the middle of the festive season. Do you think consumption will be the key driver of earnings?
A: This year, the festive season has been delayed by 30-45 days as compared to the previous year. Currently, the expectation is that the recent weakness we have seen in some segments should correct as festive season buying starts. However, the risk could be only on the downside for estimates, if demand does not pick up. We believe it is unlikely to see estimates getting revised upwards for consumption-related sectors.
Q: Which sectors are you upbeat on and why?
A: We like large-sized corporate lenders and banks which have a strong CASA franchisee. We believe the pain on NPLs (non-performing loans) is coming to an end and with the current liquidity scenario banks with strong deposit and capital adequacy should do well. IT stocks, both in the large and mid-cap space, have seen some weakness in the near term post their huge outperformance. This year on a YTD basis, we don’t see the rupee reversing quickly amid global uncertainty. So we expect IT to outperform. With valuations being on the lower end in the materials and oil & gas space, we think that a large part of uncertainties has been already priced in.
Q: Which sectors are you avoiding?
A: We are underweight on the consumer discretionary, consumer staples and telecom. We have some downward bias on earnings for the sector.
Q: After the recent sharp correction in stocks, where do you think we stand in terms of valuations and earnings?
A: Valuations are still on the higher side with respect to historical multiples. As mentioned earlier, we could see some downgrades in earnings as the second quarter result season is underway.
Q: Most market experts do not see much upside in Indian markets in the next 6-12 months. What is your view?
A: Over the next few months there are a lot of events (global and domestic) that could overshadow equity fundamentals. These will keep markets volatile. However, this period of uncertainty and volatility should be used to build a good strong long-term portfolio.
Events to watch out for would be Iran oil exports restrictions (November 4), US mid-term elections (November 6), domestic state elections (November-December), December read on inflation and monetary policy, and opinion polls early next year in the run-up to the general elections.
Q: What are your views on NBFCs? Do you think the golden run they enjoyed is now over? Any NBFCs that you think are still good buys?
A: NBFCs over the years have gained market share as PSU banks were not being able to meet the credit growth needs of the economy. It’s not right to paint all NBFCs with the same brush, and one needs to take a closer look at different franchises based on asset break up, capital standing, etc. before taking an investment decision.
Q: Do you think crude will rise above $100 per barrel? And if that happens, will the market erase all the gains it made this year?
A: It is difficult to hazard a guess on oil prices, but looking at demand-supply and the looming trade war between US and China we expect lower oil demand growth. But with increasing prices, more supplies could act as counteracting force. We don’t see a scenario of oil hitting triple digits.
Q: What is your near-term outlook on the rupee?
A: In our view, worst of rupee depreciation for the near term is over. However, it could depreciate if the Dollar Index rises due to the Eurozone crisis (Italy) and a tightening labour market impacts inflation and US treasury yields.
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