#39;Delayed recovery in corporate earnings is affecting foreign inflows#39;

February 13
15:02 2020

From a fund flow perspective, India could expect flows coming in at regular intervals till the easy money policy followed globally is reversed. The only issues slowing the inflow is the delayed recovery in corporate earnings, Deepak Jasani, Head Retail Research, HDFC Securities said in an interview to Moneycontrol’s Sunil Shankar Matkar.

Edited excerpt:

Q: What are your thoughts on market? Will the market maintain positive momentum?

Government has been trying hard to revive growth in the economy. The Budget event is behind us; but the issue of coronavirus, its impact on global and Indian growth rates is still ahead of us. Also revival of corporate earnings growth on a broader scale is eluding us. Global liquidity conditions remain favourable boosted by the latest infusion by the Chinese Central Bank. Interest rates globally remain stable at low levels.

Hence, from a fund flow perspective, India could expect flows coming in at regular intervals till the easy money policy followed globally is reversed. The only issue slowing the inflow is the delayed recovery in corporate earnings. If we see signs of this happening in Q4FY20 or Q1FY21, then we could expect faster inflows.

Q: As we are in the last week of December earnings season, what are your thoughts on overall earnings and does that indicate any recovery signs?

The revenue growth has been the lowest in 16 quarters. This was on a low base of Q3FY19. Political / social unrest in some parts of the country also hindered performance of India Inc in Q3 (and this may extend to Q4 in a small way).

The muted growth in PAT is largely helped by the lower tax due to corporates tax cut announced in September 2019. Some sectors have however benefited out of lower commodity prices and/or cost control measures.

Management commentaries have also been cautious/conservative.

In Q3, banks have reported lumpy slippages from the corporate sector, but the good thing is that these are largely from known accounts. Though overall asset quality is on the mend, new additions from financial and MSME sectors keep analysts on toes as far as projecting profitability of Banks is concerned.

Liquidity tightness, extended impact of demonetization/GST also impacted a few sectors. However rising crop prices and good rabi sowing could result in rural demand revival towards the end of Q4FY20 or early Q1FY21.

Q: Does the January Manufacturing and Services PMI data along with November IIP data indicates economic growth bottomed out and was it the reason for recent rally (post budget)?

Yes, they seem to be the first signs, however we need to see more such numbers coming in quick succession for getting more comfort. The recent rally is also driven by global risk-on sentiments and catching up with other emerging markets. Also the few events that had the potential to create lasting uncertainty are now behind us.

Q: Will it be a year for midcaps/smallcaps than largecaps, after sharp underperformance in previous two years?

Midcaps especially could do well over the next few months on valuation and ownership basis. If SEBI relaxes the classification norms then the process could gather pace even earlier. However one will have to be careful about stock selection as a lot of the small and midcap stocks have been impacted over the past 1-2 years by technological, regulatory, competitive, financial disruption.

Q: What are those sectors/stocks that will get benefitted from fast-spreading coronavirus that forced shut down of several manufacturing plants in world’s second largest economy China?

Chemicals would be the obvious choice but the relationship is not so simple. China is a big consumer and also a supplier of raw materials and intermediates. Hence one will have to go company by company based on publicly available information to deduce the real beneficiaries of the scare (and that too if it lasts beyond mid-February).

Q: Do you expect major rate cut transmission this year, after RBI indirectly ask banks to cut lending rates?

Yes, the rate cut transmission will be faster and more than earlier. The yield curve will also be steeper than before. However given the fact that the small savings rate are still sticky, we cannot expect the rate transmission to be same as that done in the repo rates. Also with the disparity in credit ratings and increasing downgrades of corporates, lenders will like to have a cushion for higher slippages by protecting (or even expanding) their NIMs.

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