Markets have been reeling under a barrage of negative news flow and macro-economic headwinds since the last one year. In these trying times, foreign flows will dictate how the markets pan out, going ahead, Nikhil Vora, managing director, IDFC Securities, tells Ujjval Jauhari, in an interview. Edited excerpts:
How do you see the June quarter results season panning out? What are the key positive and negative surprises that one can expect?
Sensex earnings growth is expected to come in at 11.5 per cent in the first quarter of the current financial year, against 16.7 per cent in the previous quarter. The growth would be a more tepid 7.1 per cent year-on-year (y-o-y), excluding SBI (State Bank of India) results (higher earnings due to a low base).
Non-commodity companies are expected to report strong numbers, led by IT (information technology) services, pharmaceuticals and financials. Earnings of commodity-related plays are likely to contract by 20 per cent y-o-y. The companies that can clock in strong bottom line growth are Tata Motors, Infosys, TCS (Tata Consultancy Services), ICICI Bank and State Bank of India.
Continued raw material price pressure is likely to compress the margins of Sensex companies by 135 basis points (bps) y-o-y (down 40 bps quarter-no-quarter) to 19.3 per cent. Our Sensex EPS (earnings per share) stands at Rs 1,257 (14 per cent y-o-y) for FY13 and Rs 1,377 (10 per cent y-o-y) for FY14.
There have been concerns regarding how the monsoon season may pan out. What is the likely impact one can expect?
Monsoon has been marginally below normal till now. However, things can change. As per our recent study, the impact of monsoon is not as profound as it has been believed till now. There is a reverse logic to it.
The inherent capability of farmers to invest in their farms has been far superior given the last 10 years of good or average rainfall. So, they have not only been investing in agri-equipment and farm lands, but also in back-end systems such as water reservoirs, drip irrigation, etc. Hence, the impact of monsoon may not be as severe as witnessed earlier, and that is a very big positive.
So, the consumption story for India remains intact since there is no major impact?
Our recent study across seven relevant states shows the income levels and the discretionary spends have increased. Further, the farmers are better-informed now.
Over a period of time, people outside metros have spent sufficiently in monitisable assets such as gold, farm land, etc, and the prices of these assets are at all-time highs. The demand scenario, too, is not that bad. The growth in auto sector is still robust; and so are other FMCG (fast-moving consumer goods) spends.
There is a lot of pessimism that had set in with the downgrades or risks of downgrade by rating agencies. What is your assessment of the situation?
I am really surprised that a country that was being praised a year ago has suddenly been subjected to all this because of one year of slowdown and GDP (gross domestic product) growth, declining from eight per cent to six per cent.
I think the consumption story is still going strong in India, compared to the US, which, I feel, is a bigger problem for the US economy. Yes, the investments in infrastructure space in the Indian context have taken a back seat, but as the interest rates move down, the situation will improve. The slowdown we are witnessing is a cyclical and not structural in nature. There are pockets of pain but as long as people get employment at a reasonable wage, we are perfectly good.
How do you look at the market performance? Which sectors/stocks still offer value and which ones need to be avoided?
Indian markets have been reeling under a barrage of negative news flow and macro-economic headwinds since the last one year. The jury is still out on whether it is the ‘worst’ yet or not, but these are indeed trying times – not only for the developed world, but also for developing economies. Overall, while the market direction would depend on how global events unfold, particularly global flows, and domestic growth momentum, we remain positive on Indian markets from a one-year perspective.
With monetary policy likely to become more accommodative, we remain more positive on rate sensitive sectors like infrastructure and financials. While betting on India’s consumption story, we believe the valuations will determine the entry strategy in this space. However, we remain cautious and suggest limiting exposure to global cyclical such as IT services and commodity businesses (metals and oil and gas) as the global growth outlook remains hazy.
What is your outlook on the rupee?
While crude oil has corrected by seven per cent in year-to-date (YTD) in 2012, depreciation in Indian currency (5 per cent in YTD CY12) has offset most of the gains. Given the high current account deficit, we expect the rupee to remain under pressure in the near term. However, deceleration in non-oil imports, lower gold imports and reduction in crude import bill should lead to reduction in current account deficit in FY13, thereby, resulting in appreciation in domestic currency over the next one year.