Earnings to Grow 13-15% in FY17, Expect More Rate Cuts

Gold Silver Reports — Earnings to Grow 13-15% in FY17, Expect More Rate Cuts — Earnings growth is likely to be in 13-15% range in the current financial year following three years of flat growth, said Shekhar Sambhshivan, investment director at Invesco. If earnings catch up, Indian markets will start looking better on the valuation parameter as well, said Hong Kong-based Sambhshivan, in an interview to Sanam Mirchandani.Edited excerpts:

What is your assessment of the recent actions by global central banks such as the BoJ, US Federal Reserve and the ECB?

The expansionary policy of central banks such as BoJ (Bank of Japan) and the ECB (European Central Bank) will continue. There is no shift in terms of mindset. That is why we are seeing low yields in most parts of the world. In the US, there is a possibility of a December rate hike. Rate hikes are likely to happen at much slower pace and will be dependent on how the US economy will grow.

Do you think Indian equity market is overvalued?

Valuation is more of a by-product.On an absolute basis, India seems to be scoring alright on almost all the macro economic factors. Growth on a real basis is at 7.5-8%, inflation is at 5-6%, and nominal growth is at 13-14%. Interest rates are likely to come off more in the near future.Forex (foreign exchange) reserves are at all time high levels. In emerging markets, not many economies are close to giving a comprehensive package of risk and return to investors which is as good as India. If earnings catch up, valuations will look better. There will be corrections but not a deep correction or a bear market phase.

In recent years, there is consensus expectation of double-digit earnings growth in the beginning of the year and it gets toned down later.Will FY17 meet a similar fate?

I doubt this year would be similar to the last three years, when earnings were flat. This year again started at about 16-17% consensus earnings growth expectation in terms of the Sensex and the Nifty earnings. We have not seen meaningful downgrades after the first quarter results. My sense is earnings growth will be at 13-15% in FY17. If we are able to clock somewhere between 15 and 17% on an exit basis, that would lay a good platform for FY18 and FY19 earnings. In the next two quarters, we are entering into a period of festivities and so, earnings should sustain. Delivery on earnings is something market will be watching closely. Disappointments on that will not be easily accepted.

What is your assessment of the Reserve Bank of India’s recent rate cut decision, policy commentary?

Focus on inflation and continuation of policy is clear in terms of the commentary. Going forward, the stance is likely to be accommodative as inflationary forces have eased out, helped by good rainfall. Kharif and hopefully, Rabi crop produce is also likely to be reasonably good compared to the last two years. Global interest rates situation has probably given more confidence to the RBI on real rates. There is a possibility that we might have some more rate cuts in the future.

How does the reforms picture look?

We have had two-and-a-half years of this government. They have done quite a lot in this time frame. There could be some time lag in implementation, but we are not much worried about it as long as the intent and the agenda are very clear to take the country forward on the path of development. The financial inclusion aim of the government has strong legs.

Do you think PSU banks will continue to lose market share to private banks?

The departure of market share from public sector banks to private banks and NBFC’s (non-banking financial company) will continue in the near future. It doesn’t mean there won’t be any good public sector banks.Nowhere else have we seen this type of dichotomy that the profitability of private banks is higher than the entire public sector banks put together but the advances related market share of PSU banks is as high as 70%. This dichotomy cannot continue.

The IT sector has been subdued.Will it continue to see headwinds?

The revenue share of most of the IT companies is more tilted towards the BFSI space. Almost all their clients are either downsizing or reviewing their businesses across the globe. It is not possible for these companies to enjoy a very good growth phase.But there are some good business models in the IT space. They will figure out some way of sustaining after the challenging phase is over. The good companies will evolve.

What is your outlook on the midcap space? Valuation premium to large caps is at a multi-year high.

One has to be very careful about this space in terms of differentiating between wheat and chaff. One should look at models that are superior in terms of business, pricing power and the segment of the company.Investors should look at whether the company is doing the right things in terms of capital allocation, which will give better returns and sustainability in earnings.

Oil marketing companies have so far outperformed the oil sector in 2016. Will the good show continue?

OMCs commanded premium valuations in 1990s. Over a period of time, there were many government regulations that led to return ratios coming down. For the last two-and-a-half years, the government is slowly deregulating. More importantly, it is not reversing any of the policies on its chosen path of deregulation. If there is clarity that regulatory control is behind us and if they deliver good earnings based on rise in marketing margins and GRMs (gross refining margins), more confidence will return. — Neal Bhai Reports

Earnings to Grow 13-15% in FY17, Expect More Rate Cuts


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