The crack that is currently playing out on the Dalal Street today is not on the back of the SIT report on blackmoney, but is just the market reacting to poor Q1 numbers announced by corporates, says Krishna Kumar Karwa of Emkay Global Financial Services.
A Supreme Court-appointed SIT on Friday asked regulator Sebi to compulsorily identify real owners of foreign funds coming through the controversial P-Note route and also prosecute those using equities for tax evasion.
In an interview to CNBC-TV18, Karwa infact says the Indian market is in a consolidation phase and he doesn’t see any major challenges for the Nifty in the long-term.
Stock valuations, however is a totally different story according to Karwa who is confident of a downgrade cycle hitting the market.
While asset quality remains a concern for the banking sector, Karwa says an investor’s portfolio must have financials and capital goods apart from pharmaceuticals and fast-moving consumer goods.
Latha: What is your sense, do you think that it is all the p-notes issue that is spooking the market or do you think the market was headed lower anyways? We have got this reassurance on p-notes that nothing knee-jerk will be done, how do you explain the market performance?
A: As far as the p-notes issue is concerned, various regulations whenever they are introduced I am sure the government of India is cognizant of its impact on the capital market and there will be sufficient time, etc which will be spent before any regulations are introduced. So, I don’t think so that there is any knee-jerk reaction as far as the p-note issue is concerned.
As far as the market is concerned, we are in this consolidation kind of a phase where we did have a decent run up pre-results and as the results have started flowing in and naturally fair valuations so there is some money being taken off the table and that is what we are possibly seeing now. Even last week if you see markets were very volatile and you had uptick of 1 percent and downtick of 1 percent the next day. So, basically the market is in a consolidation kind of a phase and that is what we are witnessing currently.
Latha: You are saying is even without the p-notes issue the market was headed lower and are headed lower?
A: Market is reacting to the result flows as such so I think market is very rational and stocks are reacting broadly based on the results and the valuations matrix and that is what we are currently seeing.
Sonia: What is the strategy that investors should adopt now? Is it better to raise your cash levels and take some profits out of this market or do you continue to buy on every dip?
A: As far as investing is concerned, it is a continuous process. I don’t think so you react on every piece of news flow and every quarterly result. I think that is the function of valuations and what is your time horizon. So, I don’t recommend investors should be doing any knee-jerk reaction based on a few quarterly numbers disappointing, etc.
Also, the time horizon is very important, I think from a longer term perspective I don’t think so there are any challenges. Maybe in the immediate run you could possibly see some stock price correction happening because stocks possibly have run ahead of fundamentals.
Latha: Going by the kind of numbers we have got so far in the result season and usually the better numbers come in the beginning, what is your sense about when earnings will improve? We have got those early bird collated numbers from Business Standard and they are crying out that profit is grown barely by 5 percent, much lower than what they did even in the same period of the previous quarter. So, when do we see earnings improving, which quarter you think?
A: Based on various ground level checks and corporate interactions, etc improvement is at least a few quarters away if not long, if not more. So, from that perspective possibly we are going to see many more earnings downgrades, etc. I think that downgrade cycle has still not got completed as far as the analyst expectations, etc are concerned. So, maybe this quarter you would possibly see the maximum of downgrades, etc happening.
As far as improvement in earnings, everybody seems to be of the view that it should be the second half. Let us see how second half pans out. We believe that FY17 is the year to look at and FY16 will possibly be a year of very muted growth on broad numbers.
Sonia: How do you approach a space like pharmaceutical after the big collapse that we have seen in stocks like Lupin and Sun Pharmaceutical Industries ?
A: That space has disappointed. This is the second quarter on the trot where we are seeing some of the large pharma names disappointing and the larger pharma companies seem to be having poorer pipeline. One of the companies is grappling with major merger that they have done, the other company doesn’t seem to have a strong pipeline of products at least for the immediate 12 months.
Therefore, investors have started questioning that pharma has had a super run in terms of valuations etc and the growth that they have seen in the last three-four years. Is there a case building up for a slight gradual derating of many of these companies in the next 12-18 months? So that’s the question mark which investors are grappling with. My sense is that the bigger three-four names maybe in a consolidation kind of phase and investor would possibly move to the next line of pharma companies which possibly will be able to show much better growth than the bigger companies.
Latha: Let me turn attention to the banks. The results posted by the likes of Indian Overseas Bank (IOB) were absolutely disastrous and even the other banks and even non banking financial companies (NBFCs) like Mahindra & Mahindra Financial Services (MMFSL) are giving a scary idea of the amount of loan defaults that are still happening. How do you approach private sector banks now since they were a little unscathed?
A: As far as the new generation private banks are concerned, the two or three results which have come, the results have been good and stocks have reacted stable to positive. So, there the challenge seems to be minimum as such as far as the asset quality, etc is concerned. The challenges are in the public sector banks where we have not seen too many of the biggies yet coming out with their results. So, the asset quality concerns still remain.
As far as some of the NBFCs, etc are concerned, like one of the names we mentioned, it is a seasonally weak quarter. The numbers have been below consensus but I would not press the panic button there because a few good quarters if the rural India performs well, there is decent monsoon and two quarters down the line you could possibly see a recovery number also surprising you on the positive.
Sonia: Would you extend this argument to the FMCG space as well because there are so many stocks in the broader FMCG market, names like Dabur, Emami, Britannia which are still doing much better than the overall market? Is this a space that you would be bullish on?
A: From a growth perspective, yes, they seem to be delivering decent set of numbers. The challenge over there in that space is the valuations. The valuations are kind of priced to perfection. So I don’t know what kind of returns can you make if you are going to be investing in these companies at current prices. So, it is not a question of growth over there, it is a question of the valuations which doesn’t leave much margin for growth, price appreciation in the immediate run.
Latha: I just wanted to ask you what would be your stock allocation be? If I were to give you a Rs 100 to invest what would be the percentage allocation across sectors now?
A: The way it works is that financials should form an important part of your portfolio because that is where in the next 24-36 months whenever things improve you could possibly see the maximum up tick over there. Then second you come down to cap goods and infrastructure. So, these are the two segments which should attract a decent amount of your capital allocation.
As far as pharma and FMCG is concerned, they are the more stable kind of portfolios that you own. Last but not the least, oil and gas is one where you have the oil marketing companies and the refining segment doing well. There, there seems to be a structural change in that segment and maybe slightly higher allocation to some of these PSU refiners. That could be a segment where you could see possibly good appreciation.
Sonia: The oil marketing space which has already given substantial returns, don’t you think investors may have missed the bus at least the ones who have not participated or is there still a lot more to go?
A: I think there has been a good appreciation in most of those stocks in the last six to nine months. However, having said that, if you believe that crude oil prices are expected to be benign then the subsidy issues are behind the companies. If you believe that over a period of time direct benefit transfer (DBT) will be implemented and you will have also kerosene subsidy being largely reduced then structurally there is a very positive tailwind for the whole segment.
This is a segment where as far as the retailing is concerned there is a huge amount of entry barrier. So, gradually if they are able to deliver decent return on capital employed then the discounting that these companies attract could be much better than what they are currently.
Latha: I just wanted to ask you what you have made of the IT numbers, is that a sea change and will that make you increase your allocation to that sector?
A: As far as the largecap IT sector is concerned, they seem to be facing a lot of headwinds as far as growth is concerned. We have seen that in many of the IT companies numbers also. So, that is a sector which we believe will underperform for some time. So, I am not too sure that we will be increasing our allocation.
One quarter doesn’t make us change the view. One of the companies have delivered very good numbers in this quarter but overall if you look at it, it is still a 8-9 percent kind of a annual growth and the discounting are relatively rich.
Latha: Would you say that the market is protected at 8,000 the way things are?
A: I would tend to agree, I think we are in this consolidation kind of a range. The range itself is like 8,000 on the lower side and maybe 8,800-8,900 on the higher side. That is the kind of range we seem to be in as of now. I think that should be there for the next three to six months barring unforeseen, unprecedented inflows, etc.