Q3 earnings in line, but see limited triggers for further market

rerating: Siddhartha Khemka

What are your thoughts on market as Budget is behind us? Will the market maintain positive

momentum?

The much-awaited Union Budget fell short of expectations of giving the intended stimulus which could

put the economy back on the high growth path. Overall from an equity market perspective, the budget has

been a non-event and failed to live up to the lofty expectations. With Budget behind, the market's focus

would now revert back to fundamentals, viz. corporate earnings and global cues around the spread of

Coronavirus. Some of the macroeconomic data are showing positive trends. However, we still expect the

growth recovery to be gradual.

While the Nifty trades at a 12-month forward P/E of around 18x, at only 1 percent premium to its long-

period average, we still see limited triggers for further re-rating, unless accompanied by a material

surprise in earnings. Meanwhile, select sectors with better earnings visibility will continue enjoying

valuation premium over the broader markets.

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 Q3FY20 earnings season so far has been largely in line with expectations; with tax cuts driving the

profit beat. While the consumer sector has exceeded, automobiles, capital goods and metals have missed,

and private banks, NBFC and healthcare have met our expectations. Management commentary is

incrementally positive on rural consumption (both Auto and Consumer managements alluded to rural

consumption recovery) but cautious on loan growth/asset quality trends in retail banks.

We expect the markets to stay narrow until the emergence of greater evidence of growth recovery.
Q: Does the January Manufacturing and Services PMI data along with November IIP data indicate

economic growth will recover?

The underlying growth dynamics for the economy appear to be bottoming out with some of the high

frequency indicators showing positive trends. Rural consumption is on the way to recovery, given the

increase in food inflation, improving farm economics and high reservoir levels. Moreover, auto monthly

numbers and PMI data for manufacturing are showing stability. All these factors supported the recent

rally in the market.

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?

Textiles, ceramics, homeware, chemicals and engineering goods are some of the sectors benefiting from

the fast-spreading coronavirus in China. The companies involved in the export of such goods are

receiving an increasing number of inquiries – mostly from United States and European Union.

Q: Do you expect major rate cut transmission this year, after RBI indirectly asked banks to cut

lending rates?

In the last monetary policy, RBI announced various non-interest rate measures including durable liquidity

of up to Rs 1 trillion for a longer period of 1-3 years, reduced cash reserve ratio (CRR) requirements for

SCBs on lending to specific sectors and relief to lenders on their exposure to MSMEs and the commercial

real-estate sector. However, how these measures will lead to better transmission in the real economy

remains unclear. Since the banking system has been in massive surplus for the past 8 months or so,

further boost to liquidity is unlikely to revive economic activity.

Worrying though is that some lenders may be tempted to fund sub-prime projects or evergreen loans, thus

creating further concerns over the medium term. With inflation expected to remain high in CY20, we do

not expect any rate cuts during the next 3-4 meetings.