Interview with AK Prabhakar, Head — Research, IDBI Capital
Even as the market is witnessing a pullback rally of sorts in the past few sessions, earnings hold the key for Dalal Street, AK Prabhakar, Head — Research, IDBI Capital, told Moneycontrol’s Uttaresh Venkateshwaran.
“Last quarter’s results were very good, with growth of 11.5 percent. Going forward, it is doubtful whether this shall be sustainable and in that case, we could see more selloff," Prabhakar cautioned, adding that the Street will keenly observe the commentary which at the moment is "worrisome".
"Liquidity has dried up from the market, while noise around scams has reduced lending to SMEs and MSMEs, which can create an impact too,” he further said.
Edited excerpts:
The market has been trading off its record highs in January. There has been consolidation ever since, with bouts of rally. What is your outlook for this fiscal and for the year-end?
January was a good month for the market, but the Street saw a correction of more than 10 percent from all time high levels seen earlier. Now we are seeing a pullback rally and beaten down stocks have performed well from the upmove we are seeing from March 23. We could see another 100-200-point spike, as the earnings season is about to start. Major part of the focus will be on earnings season.
So, I am not too positive on the market right now. Every time, after the results we end up downgrading our earnings.
Last quarter’s results were very good, with growth of 11.5 percent. Going forward, it is doubtful whether this shall be sustainable and in that case, we could see more selloff.
The Street will watch out for the commentary as well, which is currently worrisome. Liquidity has dried up from the market, while noise around scams has reduced lending to SMEs and MSMEs, which can create an impact too.
So, can we see range-bound moves ahead? Say, till the earnings season…
Being the end of financial year, this is a stretched earnings season. We may not get the right picture immediately. It has to be understood that global worry will not die despite what has been said by Chinese President Xi Jinping (on opening up of economy). There is an issue related to Russia as well and the market there has corrected. So, overall, there is some global pressure seen. Adding to that, Indian market is not cheap either. In this context, if earnings don’t catch up, we may have an issue ahead of us. Additionally, midcaps and smallcaps are still very expensive as compared to largecaps.
Have earnings and EPS growth estimates for FY18 been on track. Do you have a view on this going forward?
Information technology as a sector has delivered far better returns, while oil and gas has been up to the mark. Among private banks, top four banks have been delivering consistent results.
But the problems arise apart from this. Metals have given good results in last 3-4 quarters.
I have my doubts about this going forward. Auto companies have also seen good numbers, but raw materials costs have risen as well. This has not been passed as well. So, it is possible that some margin pressure could be seen.
What are the key risks for this market then?
We have multiple elections coming up—Karnataka, Madhya Pradesh, Rajasthan as well as general election. At the ground level, e-way bill is seen going smooth, but credit to the system needs to be done faster.
The monsoon factor also needs to be considered. By mid-May we will come to know about its progress.
But if results season is very good, all these things can be mitigated.
Are there any geopolitical risks?
It is about Russia and the US tensions and how that will pan out. European nations have distanced and sanctions are seen on Russia. So, that situation needs to be seen.
Moreover, after the RBI policy, bond markets have jumped, which is not a good sign. Plus, aluminium prices are going up and there is now a cycle where pressure will pass on to user industry. So, there is going to be inflation pressure.
What is your view on midcaps space? They have seen considerable correction so far…
There are quality names available at reasonable valuations. For instance, D-Mart, Trent, Shopper Stop…it is about retail consumption that one has to focus
There are names in the midcap IT space as well. These companies will grow aggressively. Companies have transformed as well from normal to digital and cloud activity.
How do you expect rural and agri-focused stocks to perform, given the outlook on monsoon along with public spending by the government ahead of elections?
There could be a short term rally in Agri-related and rural related themes. But it also depends on which party will come to power. One has to consider the political calculation and if there is a change in the ruling party, then we have to see. You have to be in stocks where any change in political course does not have much impact.
After all the noise around Punjab National Bank, are there any value picks seen in PSU banks?
The worst (news) of the sector has been priced in. If you are looking at 3-4 years, there may not be more issues from now. So, Bank of Baroda, Canara Bank, State Bank of India are all good picks. But you need to be patient and stay with it.
You mentioned earlier that there is a liquidity issue in the market. There have been many IPOs to hit the market at high valuations? Do you sense a correction in the IPO space?
IPOs in the last two years have been very good. But valuations which the promoter are demanding is sky high and must see a correction. It will happen as was the case in 2008 as well. Such kind of an influx (of IPOs) cannot sustain in a market where foreign investors have been sellers. Mutual funds also have their limits on investing these.
Plus, the people need to be given back as well. Look at Lemon Tree, the stock rose 28 percent on debut day. This will attract people but one has to be very careful as there are competitors available with reasonable value. There are debt free companies such as Mahindra Holidays etc. Even companies which have been here for a very long time do not quote this kind of a premium.
Lastly, are bad days over for pharmaceutical names?
At these prices, the downside risk is limited but there is lack of growth. The latter needs triggers right now. Pricing power in the US is no longer there. From here, deterioration will be less for such stocks.