Chance of earnings disappointing in FY17 slim because of low base: Anand Radhakrishnan

Interview with CIO, Franklin Templeton Investments-India

Helped by a favourable base and customer confidence returning across sectors, Anand Radhakrishnan, CIO, Franklin Templeton Investments – India, in a conversation with Ram Prasad Sahu and Hamsini Karthik explains that earnings will be strong in FY17. Edited excerpts: 

Does the current rally have more legs to run?

From an economic perspective, a few things have changed for the better. High frequency variables that indicate urban consumption are decisively far better. For instance, airline traffic is growing at a faster pace, hotel occupancy rates are going up, volume transactions on credit cards are increasing. Currently, the consumption part of the economy is getting its act together, thanks to government efforts. Where we have an issue is the investment part. So, the rally in the market is not just based on liquidity as we have turned around on some aspects. 

What is driving consumption at the moment?

Job creation, wage growth and availability of credit at cheaper rate are the reasons for consumer confidence coming back. Business confidence comes out of stable and non-obstructive system. We had lost this plot earlier and now it is coming back to the system. So, though there is not much of fresh capacity additions, companies are trying to squeeze the most out of current capacities. But, wherever there is FDI, capacity additions are happening. May be in two years or so, we will see domestic companies contributing to capacity additions. But that’s a function of demand.

GST didn’t seem to be a material event for the market.

Passing of the GST constitution amendment bill is a positive development. But implementation will take time and benefits are not likely to accrue in the first 1-2 years after the passing of the bill. While the implementation of the GST bill could result in a temporary pickup in inflation, over the longer-term it would lower inflation as input tax credits are better utilised and the costs of internal trade are lowered. 

What are the next triggers for the market?

Earnings support is critical. There is adequate earnings support from automobile companies. Private banks continue to do well. Public sector banks, on a low base, may deliver better in FY17. We have enough growing companies in cement, healthcare and IT sectors. Profits are hitting new high and as long as this happens, we think, markets will be okay. The number of companies that are hitting a new high in terms of annual profits stand at 190 as of March 2016. We expect this number to increase in the coming years. The Sensex EPS itself is at a new high because of the new highs in profit. But, when there are 250 or more companies recording new-highs in terms of profit growth, I can say market is at a comfortable level. Till that time, the market breath is limited for my comfort. I see another 4–6 quarters to get to that comfort zone. 

How do you read the June quarter results season?

This year, the chances of being disappointed with results may be low as growth will come from a relatively low base. Excluding the PSU banks and metals, companies delivered about nine% average growth last year. PSU banks and metals have also bottomed out now and on a year-on-year basis, comparison will be more favourable this year than last year. While PSU banks will continue to make provision for bad loans in FY17, it will be lower than that of FY16. Therefore wild swings that happened in earnings estimates earlier may not occur in FY17, though there may be some lowering of estimates. There are intra-sector market gains and base effect growth is contributing to increased revenues and profits. The market is also rational now, rewarding stocks which are delivering earnings growth and punishing those which are disappointing. So on an aggregate basis, we can’t say the market will correct. 

What are your major sectoral bets and where you are underweight?

We are overweight on finance and private sector banks as they are a play on the deepening credit market as also the fact that they have gained market share from public sector banks. The other sectors where we have a major exposure is automobiles and ancillaries which we think is a consumer play with investments in two wheelers, cars and tyres among others which are a play both on urban and rural consumption discretionary themes. Quantum wise in IT we have a large exposure, though we are underweight on them right now. While it is growing at 10% levels, it is a safer bet as valuations have adjusted for this. Where we are underweight are the consumables (FMCG), commodities and some utility companies on valuations, lack of triggers given excess supply.