Current correction has taken the PE levels to reasonable levels of 15x and the probability of flat earnings growth next year is low given the sharp base effect in demand and fall in the commodity prices, said V. Srivatsa, Fund Manager and EVP, UTI Mutual Fund. 'We believe that the correction gives the investors a very good opportunity to accumulate equities.'
In an interview with Sourabh Pandhare, Srivatsa, who manages assets worth Rs 25.50 billion, said, 'A very sharp fall in the crude prices is mixed for the Indian economy with a probable negative bias. From an Indian equity perspective, we need stable oil prices in the region of USD 40 to USD 50 / bbl so that we are able to manage our trade and fiscal deficits and also receive our share of the flows from the oil producing economies.'
Excerpt from interview:
1. Recently Indian stock markets touched 20-month low amid concerns over correction in Chinese markets fueled by slowdown in the second largest economy. What is your take on recent correction? Is the fall in the Indian markets justified/ excessive?
The fall in the markets is largely led by very weak global sentiments towards risk assets and most of the asset classes have taken a knock in the last quarter and the last year with very few assets classes delivering positive returns. China remains the driver of global GDP growth and especially the demand for global commodities where it drives large part of the incremental demand and the slowdown in china has impacted the commodity prices and has set a panic reaction amongst most emerging markets. India has been impacted by the huge negative sentiments towards emerging markets equities and has borne the impact in the last two to three quarters. On the domestic side, while there are mixed signs of recovery, we are yet to see any recovery in the corporate earnings which is the main driver of the markets as they continue to be impacted by high commodity prices and readjustment to lower revenue growth on account of sharp deflation. The current correction has taken the PE levels to reasonable levels of 15x and the probability of flat earnings growth next year is low given the sharp base effect in demand and fall in the commodity prices. Hence we believe that the correction gives the investors a very good opportunity to accumulate equities.
2. Steep decline in oil and depressed commodity prices are helping Indian economy. But at the same time, fall in prices impacting energy and resource companies and their respective stocks heavily. Does equity markets need higher oil and commodity prices at this point in time for staging a bounce back from current levels?
Crude prices historically have been an indicator of global demand and the sharp fall in the crude prices does give a very negative picture of the overall global demand and growth. From a macro perspective, India does benefit from falling crude given its huge imports and rising subsidy on fuels, however it is important to note that our inflows from the crude producing nations such as countries in Middle east is substantial in terms of remittances and investments by the sovereign wealth funds of middle east. Hence a very sharp fall in the crude prices is mixed for the Indian economy with a probable negative bias. Resource companies have taken a hit driven by huge cuts in their earnings in the last one year and we see further pressure as the current prices do not factor in the current pricing levels of the commodity that they represent. From an Indian equity perspective, we need stable oil prices in the region of USD 40 to USD 50 / bbl so that we are able to manage our trade and fiscal deficits and also receive our share of the flows from the oil producing economies.
3. What is your initial reading of recently started earnings season? What is your expectations on overall third quarter earnings season?
The initial set of results from IT, banking and consumer sector have been in line with expectations and there have no major surprises. Directionally the third quarter should be better as the full impact of the commodity prices would be felt in the resource companies and we should seeing commodity user industries to see the full benefit of the commodity decline. However the banking sector remains a grey area given the recent directive of RBI to provide for the 150 top stressed companies which could see pressure on the banks and since they contribute significantly to the overall earnings, the earnings growth could be impacted. Ex banks and energy, we expect growth in this quarter.
4. When do you see marked recovery corporate earnings performance? What factors affecting profitability of companies?
We should see profits improving in this quarter and from next quarter onwards, we should expect good growth in the overall profitability. The major factors for the decline in the profits has been the lack of demand and deflation which has pulled down the revenues of the corporate sector and this has impacted the profits even though the margins are better. The commodity part of the earnings represented by the resource sector has borne the brunt of the sharp fall in the commodity prices. We do not expect any significant decline going forward in the resource based companies. The demand has been subdued for the last two years on account of various factors such as poor sentiments, pressure on rural income on account of monsoon and reduction in government spending in rural infrastructure. We expect normal monsoon and revival in urban consumption led by improving sentiments and implementation of the seventh pay commission. Hence, we should see growth in demand for the economy which should translate into volume growth and revenue growth for the corporate sector which should set the profit growth rolling.
