Chase value rather than punt on growth

The second quarter (Q2) results have just started coming in. It is too early to see trends. If we look at consensus expectations, those are not very high. A combination of adverse macro-trends and sector-specific pressures could have led to low growth. The negative include high crude prices, a falling rupee, rising raw material inputs due to high petro prices and import tariffs, plus an NBFC crisis that has led to high bond market yields.

Adjustments will have to be made for base effects caused by GST launch last year. The Q2, 2017-18 saw restocking across many industries, which will cause a high base effect. 

The Nifty 50 had a standalone EPS of Rs 115 after April-June results came in for all 50 stocks and the market valuation would currently be about PE 25-26 given the EPS over the last four quarters. The rupee fell from 67/$ to 73.5/$ during the July-September quarter.  

While most businesses will suffer an adverse reaction to the falling rupee, this could drive growth in IT and pharma. Those are the two sectors, which seem to have major growth prospects. Other export-oriented stocks may not have done quite so well, given the overall export data for July-September. For pharma stocks too, the rupee impact will continue to be positive.

Bond yields spiked above 8 per cent and the market also faced policy rate hikes in June and August, which elevated the cost of financing. That's over and above debt-servicing issues for corporate that borrowed via the ECB route. Banks and NBFCs faced a continuous stream of negative newsflow, quite apart from the crisis building up in IL&FS. Real estate and automobiles will also have got hit by higher interest costs. 

Bank results will be dissected carefully for signs of improvement in the NPA situation, and for credit expansion. This is crunch time for PSU banks, in particular. If they cannot stabilise and reduce their NPA exposures now, they will find it very hard to do in a tighter money environment. Similarly, credit expansion on a large scale is hard to envisage. 

Big commodity players like Coal India (which will see strong volume growth), Tata Steel which has protection against imports, and ONGC could be the gainers at least in terms of sales revenues. Refiner-marketers will see top line expansion but collapsing margins. 

Big ticket consumption may have weakened for several reasons, including the higher price of imported goods (or goods with imported components). Floods in Kerala would have impeded festive season buying. However, transporters continued to add to their fleets, going by monthly despatches. The GST-related distortions make it hard to say this with certainty. 

Cement traditionally has a weak monsoon season and project slowdowns centred on the IL&FS collapse cannot have helped cement, and the related construction industry. Infra sectors in general, including roads, power and civil aviation will have poor workings. 

Rural consumption will have been a key factor. The monsoon was only slightly under-par, and the higher MSP (minimum support price) may have driven higher consumption. Hindustan Unilever's strong results could be an indicator that FMCG demand remained good in rural areas. There could be some speculative buying in the gems and jewellery space, given the ongoing festive season. 

In the energy sector, upstream companies would have done well due to higher crude prices. But the government milking reserves through enforced buybacks and cross-holdings makes all PSUs look unattractive. The reimposition of retail price controls will also have made investors wary. Downstream, retailers are likely to suffer and even mighty Reliance Industries will have seen refining margin pressure.

Overall, positive surprises can be expected in IT and Pharma including in tier-II stocks. In other sectors, investors should be cautious and chase value, rather than punt on growth.