We continue to be cautious on lending as a theme and on NBFCs we definitely want to be extra cautious, Jagannadham Thunuguntl, Vice President and Head of Research, Centrum Wealth Management, tells ET Now.
Edited excerpts:
What will you watch out for in the upcoming earning season?
We have to see how much benefit IT and pharma are able to take out of the currency weakness. Both the segments have rallied quite a bit and there was a lot of anticipation in terms of what kind of impact
rupee depreciation will have on EPS growth and in terms of rupee depreciation impact. I think it will be on positive side.
For the rest, it has to be seen what kind of revenue pickup can be sustained in the wake of high crude prices and the resultant dampening of demand. High crude prices can impact profit margins. One has to watch out on that front as well. It will be a crucial earning season considering the market has been beaten down so much. If the earning season proves to be reasonably good, there is a chance of a relief rally. Going forward, we have to see how the overall growth – economic growth, GDP growth and as well as the corporate growth -- pans out.
What are your top bets in NBFC space?
We continue to be cautious on lending as a theme and on NBFCs we definitely want to be extra cautious. RBI will probably come out with a fresh set of regulations, tightening the way NBFCs function. All through, NBFCs have been relatively less regulated in comparison to banks but after what we have witnessed in the last one-two months, RBI is likely to tighten the regulations.
Going forward, the kind of loan book growth and profit margins we have seen so far will probably be a thing of past for at least for some time. One has to be very cautious on the NBFCs and on top of that, RBI will also be probably looking at segments like
housing finance and infrastructure financing, where there is a clear asset-liability mismatch. RBI is expected to come out with more tighter regulations here also. At this moment, I do not think NBFCs is really the place to be.
Going forward, do you think the worst of the rupee fall is behind us?
I do not believe so. Rupee weakness probably will resume and moreover RBI and the government are appearing to give a stance that they are not in as much panic like in 2013. The lack of interest rate hike by the RBI clearly reflects that they do not want to send a panic message to the market.
But having said that, looking at the other emerging
markets and the way their central bankers have moved on the interest rate, it may be just a matter of time before RBI blinks. Otherwise, rupee weakness will resume.
Even though RBI has a war chest of $400 billion forex reserves, they can use about $25 to $50 billion more to defend the rupee further. Once it reaches $350 or $375 billion kind of forex reserves, even RBI has to think about other segments because being a net importing nation, we should not let the rupee weaken continuously. The argument that rupee weakness will add to the export competitiveness is not really valid from a long-term point of view. It can give a momentary high for the exporters but as a nation we are a net importing nation. Our imports are far more than exports and because of oil dependence, I do not think we should let the rupee weaken continuously.
At some point RBI has to put its foot down and then probably has to take a call how they want to move, probably that stage will come once the forex reserves fall to $350-375 billion.