FY19E earnings likely to grow by 22.8%
Interview: Amisha Vora, Joint Managing Director, Prabhudas Lilladher

At beginning of 2018, our view was that midcaps would under perform largecaps during the year. It was premised on some key assumptions (mutual fund category re-classification, market cap reorganisation, rumours around introduction of LTCG and stretched valuations), which eventually played out, said Amisha Vora, joint managing director, Prabhudas Lilladher, in an interview with Ravi Ranjan Prasad. Excerpts:

The earnings season is about to close. How has been corporate India’s performance in the April-June quarter?

The numbers reported so far show revenue/Ebitda growth of 20 per cent plus and are in line. Earnings growth has been around 8 per cent YoY, excluding Tata Motors. After a drop of 8.1 per cent in FY18, we estimate FY19E earnings to grow by around 22.8 per cent, with banks and NBFCs accounting for half of it. It points to a significant recovery.

Earnings of which sectors have been impressive or disappointed you?

The earnings season has been positive across most sectors, except auto, telecom and power. Capital goods firms like BEL, ABB and L&T reported better than expected numbers this qua­r­ter. Bajaj Finance, Cholam­an­dalam Finance and PNB Housing within NBFCs impressed the Street. Within largecap IT stocks, TCS and L&T Infotech, and Mindtree in the midcap space reported good numbers. FMCG companies like Dabur, Jubilant Foodworks and HUL delivered good results on back of strong volume growth albeit on a low base. Corporate banks reported weak numbers on the back of higher provisioning charges.

Despite several headwinds the benchmark indices touched new all-time highs during the curre­nt earnings season. But mid-cap and small-cap stocks are seeing carnage. Are large-cap stocks driving the frontline indices like the Sensex and the Nifty 50?

At beginning of 2018, our view was that midcaps would underpe­rform largecaps during the ye­ar. It was premised on some key assu­mptions (MF category re-cla­s­sif­i­c­ation, market cap reorganis­a­tion, rumours around introduct­ion of LTCG and stretched valuations), which eventually played out. In addition new guidelines on additional surveillance measures (ASM) added to the woes of the mid- and smallcap segments in April-June, as the end June was the deadline for MFs to reorganise themselves. In the April-June quarter, the Sensex gained 6.5 per cent, largely driven by the largecap index, which gained 4.2 per cent. The BSE small- and midcap indices on the other hand fell 7.8 per cent and 4.5 per cent, respectively. Obviously, some stocks corrected more than others, of which few were good quality mid- and smallcaps.

Our in-house analysis indicates that almost 45 per cent of the original midcap valuation was impacted by the reclassification guidelines and money moved out of these stocks to larger stocks.

After June, the BSE Sensex moved up another 7.5 per cent. But this time the rally was more broad based - the smallcap and midcap indices inched up around 5 per cent each and the largecap rose 7 per cent. So yes, the smaller two indices did see some carnage but some of those losses have been erased in the last 45 days. A closer look at the largecaps tells us that the rally after June was mainly led by TCS, RIL, ICICI Bank, Axis Bank, ITC, SBI and HUL. Quite a substantial amount of buying was also seen in the pharma stocks potentially indicating search for value buying as equity flows into MFs continued at $1.5 billion per month.

After 3 months of selling, FPIs turned net buyers in July by Rs 2,264 crore. What the FPIs must be buying right now – the midcaps and smallcaps or the usual largecaps?

Foreign institutional investors and domestic MFs have raised their portfolio allocations to the top 30 (market cap over $15 billion) by 400 bps over the last four quarters. Both have reduced allocation across the sub $15 billion stock (BSE 100 of Sensex and the broader mid- and smallcap universe (beyond the top 100 stocks) in the first quarter of FY19.

Monsoon has been good, so far, in southern and western parts, and have picked up in the north and the east, after delays. What’s your take on this from the rural demand perspective?

Till now the rains have been normal, so sowing has picked up. But rains in August and September are equally important from the crop production point of view. If the monsoon goes as expected, crop production will pick up and that will boost rural demand in the second half of FY19. As per IMD, rains in August and Sep­t­e­mber are expected to be 5 per cent lower than LPA, which indicates a normal monsoon whereas private weather forecasting age­ncy Skymet is predicting August rains to be 12 per cent below LPA. We need to remain watchful.

How the ongoing trade war would impact Indian firms? What should be the investment strategy in the present situation?

Domestic consumption accounts for 65 per cent of India’s GDP and the balance is equally divided between exports and investme­nts. Compared with other emerging markets in the Far East and Latin America, the Indian economy is largely domestic focused and hence would be relatively better off if global trade war were to intensify. But with large dep­endence on imported oil and twin deficits, India remains vulnerable to any spill over of the tariff war into currency wars. The export oriented companies that operate on thin margins like textiles, chemicals, dyes and intermediaries, leather and agriculture could face headwinds. Also, companies having large forex-denominated debt need to be vigilant.

As political factors due to polls in the next 9 months are going to dominate public spending and policy decisions, what kind of stocks and mutual funds should the investors target?

Any rise in MSP will benefit consumption-focused sectors like FMCG, auto, retail, consumer durables, farm implements and consumer-focused financials. Pu­blic investments can spur interest in firms catering to roads, railways and power transmission.

The equity market has made huge gains in the last four years. Will profit taking come into play as we approach 2019 general elections? 

One needs to be extremely wat­chful on the political front. Any indication of a shaky coalition government can create concern due to perceived drift in economic policies and resort to populism. One needs to focus portfolio towards firms with strong balance sheet, visible growth in earnings, free cash flows and strong return ratios.

Ravi Ranjan Prasad