Multi-year earnings recovery cycle to help market move up further: Siddhartha Khemka

A lot of the stocks are now priced to perfection and there is no room left for any kind of disappointment in the numbers. Companies where the results are either marginally below or below the Street’s expectations have been punished severely, says Siddhartha Khemka, Head of Retail Research, MOFSL.

What are your views on the correction that we are seeing at the moment? Do you think the straight line rally has gone for a toss or can it be figured out by next week?
Look at the market and the kind of rally that we have seen -- the levels to which the market has run up in terms of both valuations and delivery of the fundamentals. So, yes we are expecting the earnings growth to recover and grow sharply. We have already seen that in last year’s numbers as well as the Q1 numbers. We are at the start of the Q2 numbers and all point towards a sharp recovery in the corporate earnings. But a lot of the stocks are now priced to perfection and there is no room left for any kind of disappointment in the numbers.

Right from the beginning, in TCS where the margins dipped marginally and were below expectations, it did not go well and that we have seen now with a lot of other companies where the results are either marginally below or below the Street’s expectations. The stocks have been punished severely. The stocks being priced to perfection, there is always an issue of margin of error in terms of results delivery.

These stocks were the ones which saw sharp runups every day and some kind of profit booking had to come. The short term traders or investors would look to book out and close their profits in some of these stocks. Having said that, what is the view on the market? We believe that we are just at the start of a good economic growth phase and that should lead to a multiyear earnings recovery cycle which we have not seen for almost a decade now. It should help the markets to continue to move up.

If you look at the index level valuations, look high and if you are stock specific or sector specific, we are seeing continuous rotations. One can say smart money is moving out of overvalued stocks and sectors to some of the undervalued or value oriented stocks and sectors where there is some hope of growth coming back. For example, we are looking at the recent outperformance from banks and auto which had been underperforming for a while now. PSUs and commodities are where the value play is again coming into picture.

The outperformance of banks is a trend. I cannot call it outperformance but they have performed well in the last couple of sessions including today. The Bank Nifty seems to be on another planet. What is your take on this?
We had seen the reverse of this happening for a long time where Nifty was on the higher side and Bank Nifty continuously underperformed. Now it is Bank Nifty’s time to start performing. The good part is a lot of these movements are also backed by results that we saw with HDFC Bank numbers. We saw another midcap, Federal Bank, coming out with strong recovery in numbers.

It is similar to what we saw with IT where apart from TCS, the other IT numbers were pretty strong and we saw the kind of interest and movement both in some of the larger names like Infosys and a lot of action in the tier two IT players. Similarly, the interest in banks is on the back of the improvement in numbers. They were impacted on the second wave of lockdowns but now the third wave has been pretty controlled. We have not seen the kind of lockdowns we had seen earlier and the vaccination trend is strong and among the fastest rate globally. We have crossed 100 crore -- a big milestone for a country like India.

Economic activity is improving and credit growth and deposits growth are improving. Slippages are getting controlled although there are provisions which need to be taken care of and that is where it is in line with market expectations. To top it all, the valuations are still comfortable compared to historical averages, while the market is obviously trading at a premium.

So here is a sector which is the bloodline of the economy and if the economy is expected to do well, which we are seeing in a lot of these economic parameters -- be it the GDP numbers or GST collections. The power sector demand, the fuel demand all point towards a gradual month on month recovery in the economic trends. So, banking is a space which can continue to do well and they had underperformed, but now with the numbers expectation improving both on the corporate side as well as on the the retail and MSME segments, banking as a sector should do well.

What is really happening with Zee? The shareholders do not seem to be bothered though because after we heard that the entire Invesco case, the stock actually rebounded. Even in the last two trading sessions, we have not seen much of a fall on Zee. In fact, it has been a gainer?
It is difficult to comment on developments like these. My view would be that either ways, be it the promoters -- the Goel family -- Subhash Chandra or the Invesco -- both want to work for improving the business which is positive for a minority shareholder.

The market is taking it positively that in case of a kind of fight between both Invesco and the promoters, it will only bring out the best for minority shareholders. The only thing is one needs to have patience to ride out the news flows and developments. It is very difficult to comment now; just hope that whatever comes out from this fight between the institutional investor and the promoters, is a positive development for the firm and for minority shareholders.

Would you say that any decline in realty should be bought into?
Yes, definitely I think the good times for realty are ahead of us. The kind of demand that we have seen, has only just started and a lot of companies are sitting on a lot of inventory and the current sales in a way are clearing of inventory and a lot of these real estate companies have used them to improve their balance sheet, cash flows have improved and the management commentary suggests that demand is likely to improve and we will see a lot more new launches.

Any dip in real estate will be a good opportunity for investors to look at. The next two, three years will see pretty strong growth for the overall real estate market, especially in the residential side.