Earnings growth of 15-18% and 9,200 on Nifty possible: Taher Badshah

Interview with Senior vice-president, head- equity MF, Motilal Oswal Asset Management Company

Taher Badshah, senior vice-president and head of equity mutual funds, Motilal Oswal Asset Management Company, tells Purva Chitnis a good monsoon, gradual rate increase by the US Federal Reserve and stable commodity prices are key for markets to move higher. Edited excerpts:

The Nifty has rallied nearly 19 per cent after the Budget. What is your outlook on the market?

It has been choppy from the development point of view. Things have been better in the past three months. After the Union Budget, 2016-17, there was a bit of a comeback, a decent rally, mainly led by improvement in commodity prices. The bounce in commodities has changed the outlook on troubled economies. Second, from a market perspective for India, global investors started reinvesting into emerging markets. That brought the Nifty up, from lows of 7,000 to over 8,000.

So, we are in the midst of a very interesting period. The absolute returns on markets will in turn be determined by the growth we see in corporate earnings. We are currently trading at 16-17 times of earnings; there is an expectation that earnings for this financial year could grow 15-18 per cent. This looks more deliverable. If we get that growth, 9,200-odd on the Nifty is quite possible in 12-15 months.

A good monsoon, gradual rate hikes by the US Fed and stable commodity prices- if all that happens, we will see 18-20 per cent market returns.

The March quarter earnings have been better than expected, broadly. Is the economy on a path of revival?

The drivers for delivery in earnings are in place. However, we need a few things to fall into place. All eyes are now on the monsoon. The determinant is whether we get closer to GST ( Goods and Services Tax) this year or not. This will start impacting some industries by the end of the year, if GST is implemented. Sentimentally, it will at least lift some of the pirce to earning multiples of the companies. The third thing is if the commodity prices are maintained at this level. Overall, there are signs that things are starting to get better in terms of ground activity in various areas. The stance of companies has become somewhat confident, but full-fledged confidence is still not there.

However, rural or semi-urban demand is still not strong. While the consumer-oriented part is doing well, things that have to do with industrial demand are happening in smaller patches. Public sector investment would, thus, be the key.

Public sector banks are struggling with rising NPAs (non-performing assets), as seen from the results. What is the road ahead for these banks?

With the disclosure of NPAs, the Tier-I capital of banks has been affected. Therefore, they need decent capital infusion. On merging and consolidation in the banking sector, how that pans out would be key. Also, what happens (extension of tenure) to the governor (Raghuram Rajan) is important.

If crude oil price go above $50 a barrel, what will be its impact on India?

If crude oil remains $50 to $60 per barrel, it will still be okay and tolerated but anything beyond $60 will disrupt quite a number of things for the corporate sector, as well as the government in terms of the import bill, fiscal numbers and managing the currency.

This goes for other commodities as well. They should also not go out of control. It is important that commodity prices stabilise. Beyond this, it will start getting alarming in terms of profitability. The next 10-15 per cent rise in commodities should be okay.

On global factors, how much would the Fed and Brexit (Britain leaving the European Union) impact the market?

I really don't think Brexit would hugely impact India. The Fed rate hike would be more important for us, from the point of view of flows. There always is a knee-jerk reaction. With a rate hike, it means the US is on a path of recovery and they would do that more often. The US recovering can set up a global growth cycle. But, that will be more back-end. The front-end would be that people start running around with their money.

Mid-caps have outperformed large-caps in the past year. Do you see the trend continuing?

I think the gap will narrow but not significantly. In the case of economic recovery, mid-caps will continue to perform well. For large-caps as a basket to start performing, it is also important that global recovery takes place also.