FY18 Earnings can dip to single digit if GST pain prolongs: Andrew Holland

Andrew adds he has been expecting a risk-off phase for some time now

With the markets at all-time high levels, Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies, tells Puneet Wadhwa he has been expecting a risk-off phase for some time now. The information technology (IT), pharmaceuticals and telecom sectors, he says, will remain under pressure, as there are fundamental reasons for a fall in valuations. Edited excerpts:

Will the UK election outcome destabilise global financial markets? What about India?
 

The gamble by UK Prime Minister Theresa May did not pay off and there will be a hung parliament. This will likely lead to a softer stance on Brexit and strengthen Europe. Any thoughts of the disintegration of the European Union will be pushed aside. The outcome will not have too much of an impact on India, though companies exposed to the UK could face a difficult time.

Are the Indian markets poised for a time-wise and price-wise correction, given the run-up so far in 2017?
 

I have been expecting a risk-off phase for some time. We had a correction in May, where mid- and small-caps did take a hit. There are risks to the markets but enough liquidity is pushing these higher.

What about mid-caps and small-caps?
 

They took a disproportionate knock in May compared to larger peers and haven’t really recovered. They should not have rallied that sharply in the first place. But, investors who missed the rally in large-caps earlier on jumped in and started speculating in mid- and small-caps. The weight of money that’s carried them thus far.

What is the return you expect from the markets over the next year?
 

I generally think about earnings first and then the impact on the index. If earnings rise 10 per cent this financial year and 20 per cent in the next, the markets can rise 10–15 per cent over the next one year or so. But, I don’t think we are getting more earnings upgrades this financial year. It is only the liquidity that’s keeping the markets going.

Are there are any other risks / events that investors should be mindful of?

China is one area of concern for me. There have been reports that China has been buying more treasury. I feel it’s another way of depreciating the currency over time. Going ahead, there can be challenges to growth in China. The Chinese can depreciate the currency, like they did in 2015 and that will be a shock for the markets.

Do you think the liquidity flow into equities will continue?
 

Foreign institutional investors (FIIs) haven’t been big buyers this year. A lot of funds have found their way into other markets, like South Korea, where valuations are cheaper. In terms of domestic flow, a correction in mid- and small-caps can stem fresh allocation.

How do the valuations look?
 

Stretched. Three big sectors — information technology (IT), pharmaceuticals and telecom — are appallingly bad. That apart, we still have concerns regarding public sector banks (PSBs). For the markets, these sectors will remain under pressure, as there are fundamental reasons for the current valuations.

Your key takeaways from the March quarter results?
 

If I take the year as a whole and take out the one-offs from the public sector units (PSUs), among others, earnings growth has been virtually zero for the past financial year (FY17). This year (FY18), since I am still concerned about implementation of the goods and services tax (GST), the growth in earnings is likely to be around 10 per cent. This is assuming a disruption of around three months once GST is implemented. If the disruption lasts six months or more, this growth in earnings can dip to single digits 

Is corporate India prepared for GST implementation?
 

I don’t think so. When we meet the big companies, they seem ready for the transition. It is the small companies and PSBs that are not ready. Even if the government delays implementation, companies will never be fully prepared for the impact. Therefore, it is better to implement it from July 1.

Should investors look at domestic or export-related companies?
 

A bit of both. We are still keeping our investment theme alive with private banks and believe they will continue to take more market share. Our big sector call has been fast- moving consumer goods, where we have been bullish for the first time in years.

We are also bullish on housing finance companies and the affordable housing segment. That apart, one can pick out stocks that will be key beneficiaries of more consumer spending – i.e. automobiles and consumer discretionary-related stocks. If our views on global growth are correct, companies with exposure in those markets will do well.

What are your key takeaways from the Reserve Bank of India’s (RBI’s) recent Credit Policy review?

The policy was confusing. It is neither hawkish, nor dovish. Having said that, the RBI will have to cut rates between now and August 2017-end. That’s because the inflation is likely to stay low and the goods and services tax (GST) bill implementation will be disruptive. India Inc needs a shot in the arm and a rate cut will provide that. Moreover, the outlook on monsoon has improved with the Indian Metrological Department (IMD) issuing a revised forecast recently. This should augur well for inflation going ahead.

Can you elaborate more on the pharma and the IT sectors? Both again seem to be battling problems.

I think it is more of a dead cat bounce in both. As regards the IT sector, the writing is on the wall given the recent results; and things will get worse from here on for the sector. The downturn in the IT sector started two years ago, and it is just starting in the pharma sector now. Companies in both these sectors will have to reinvent themselves and this will be a very painful task. One can perhaps look at telecom, but now is not the time. There is more pain left for that sector as well.