Economy may have bottomed, investor sentiments can take U-turn: Prabodh Agrawal

Q&A with head of research (institutional equities) at India Infoline

Corporate India’s earnings growth will be in double-digit numbers in FY15, believes Prabodh Agrawal, head of research (institutional equities) at India Infoline, as against the sluggish single-digit growth that it has seen in the last few years. On the occasion of IIFL’s fifth Enterprising India Conference, Agrawal shared his views with Sneha Padiyath on the outlook for the Indian equity markets, foreign institutional fund flows and the earnings growth projection for FY15. Excerpts from the interview:
 
What are your views on FII flows? How has the tapering impacted the flows into the emerging markets? How is the Indian market doing compared to its other emerging market peers?

FII flows into India and other emerging markets (EMs) have been adversely affected due to better growth prospects in developed markets and less investable surplus in the US due to QE tapering. EMs, especially those with current account deficits (CADs), are being avoided by developed market investors. It's good that India's CAD has significantly reduced in the current year, when foreign capital flows have become highly unreliable.

Over the last two years, India was the largest recipient of FII flows as a percentage of its market cap, versus other EMs. Also, Indian market returns have the highest correlation to FII flows, compared to other major EMs. As our domestic household savings rate has fallen, we have become increasingly more dependent on FII flows. FII flows into India may pick-up post elections, assuming a strong reformist government is installed. India's economic and earnings growth seem to have bottomed out and investors' sentiments can take a U-turn in the next fiscal.

With the interim budget having announced excise duty cuts for the auto industry, do you expect to see a turnaround in these stocks?
Auto sector will see a turnaround when consumer sentiment and confidence revives. Rising petrol and diesel prices, high interest rates and lower disposable income due to high inflation, have dampened consumer demand. Low economic activity has dampened demand for commercial vehicles. Things should change next year as economic growth picks up and interest rate cycle turns favorable. We expect a faster turnaround in two-wheelers and passenger cars, followed by demand for CVs.

What is your Sensex target for the year end (CY 2014)?

We do not have a formal Sensex target, but I suppose it should be about 5-10 per cent higher from current levels. However, that does not mean that investing in equities will yield only modest returns in 2014. India has been a bottom-up stock pickers market for the last several years and good stock selection will continue to provide attractive returns in future.

How do you think the markets will behave in the run-up to the elections?
The markets are most likely to remain flat and range bound. A significant movement either way is unlikely, as investors wait for the election outcome. However, it may be good time to slowly accumulate quality stocks on any weakness.

What are you advising your clients? Which sectors are you underweight on and what sectors are you bullish on?
We are advising our clients to have a 'semi aggressive' portfolio-mix including stocks in consumer discretionary sector, select financials and capital goods stocks, while retaining exposure to IT and the healthcare sectors. Investors should still avoid sectors like industrials, utilities, energy, materials and PSU banks.

What are your earnings growth projections for the next fiscal (FY15)? Which sectors do you think will do well next year?
We expect earnings growth of 15 per cent for Nifty companies in FY15 versus about 5 per cent in FY14. Earnings growth has been in single digit in four out of the last six years, and moreover, actual growth has fallen short of consensus estimates in the beginning of that year in each of the last six years.

Consumer and export oriented sectors including consumer staples, consumer discretionary, consumer focused financials, IT and pharmaceuticals have delivered robust earnings growth over the last five years. However, poor growth of investment oriented sectors, including Industrials, materials, utilities, telecom and investment focused financials, has pulled down market earnings growth. We expect some turnaround in the latter set of sectors, while consumer and export oriented sectors are expected to continue growing strongly.