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    Growth to moderate at broader level; Expect more earnings downgrades in Q1 and Q2: Ganeshram Jayaram

    Synopsis

    Ganeshram Jayaram predicts that India's exports, particularly the IT sector, will be impacted by narrow interest rate differentials between India and the US, leading to lesser capital flows. This shift will also put pressure on deposit growth and keep interest rates higher. Jayaram advises clients to be cautious with growth expectations and recommends a tilt toward quality names. The Nifty is expected to show flattish returns, while sectors such as cement and industrials may offer margin of safety.

    Ganeshram Jayaraman-1200ETMarkets.com
    Ganeshram Jayaram, MD & Head of Institutional Equities, Avendus Spark Institutional Equities, says we are seeing a phase where the exports will get impacted, including the IT sector. The interest rate differentials between India and the US are just too narrow and that will lead to lesser capital flows and not just at equity level. I am talking of the economy like banking sector related flows, like the capital flows needed for corporates to borrow, which is reversing. All of this will put pressure on deposit growth and that will keep interest rates higher. It will also put some pressure on fiscal spend as we go into the year.

    Jayaram says Avendus expects to see growth moderating at the broader level. Specifically, companies where the expectations of growth have been quite aggressively pencilled in will see moderation. It is not a sector call, it is more a stock specific view.”


    The earning season so far has been a bit disappointing. While banking earnings have been largely in line with expectation, IT has disappointed. What is your take as to what it will do to the valuations of Nifty and the Nifty EPS estimates?
    We will see more earnings downgrades as we go into the result season and possibly going into the first or second quarter as well. We have been recommending clients to have a more cautious outlook on growth expectations. The macro will likely lead to more downgrades in the demand environment.

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    The Street will see it as downgrades for this over the next couple of quarters. We are seeing a phase where the exports will get impacted, including the IT sector. The interest rate differentials between India and the US are just too narrow and that will lead to lesser capital flows and not just at equity level. I am talking of the economy like banking sector related flows, like the capital flows needed for corporates to borrow, that is actually reversing. All of this will put pressure on deposit growth and that will keep interest rates higher. It will also put some pressure on fiscal spend as we go into the year.

    When we weigh all of these, we will see growth moderating at the broader level. Specifically, companies where the expectations of growth have been quite aggressively pencilled in will see moderation. We are quite cautious about aggressive growth expectations built in stocks. It is not more a sector call, it is more a stock specific view that we think this kind of moderation will play out. That does not mean we are negative on every sector, but we are more stock specific.

    The same sector will have some companies which have better margin of safety built into their growth profile so they will be better off than others. So, a tilt towards quality is what we are recommending clients to have. Quality has underperformed growth or value over the last 24 months or so. It is better to be with better quality names which will pay off as the year goes. That has been our stance and so, it is a year for capital protection rather than for capital return. So, from that mindset, we are going towards a portfolio bias which is more tilted towards quality names, companies which have margin of safety in their growth or margin profile or even in their valuations, that has been our recommended stance.

    Since you are saying that it is going to be a year of capital preservation versus capital appreciation, what is the realistic return expectation as far as Nifty is concerned for the year? Would you say it can be 0% to 5% or even negative?
    Our base case is flattish returns for the Nifty, but we do not really work with a Nifty target view. Our approach is more towards picking the right kind of stocks. We think if you are prepared with the best 10% of companies, the top well-managed 10%, can still give double-digit returns for the year and that is what we are seeking to do. Identify the companies which are not just dependent on macro tailwinds, companies where managements can make a difference in adjusting the sales and ensuring they can gain market share or find new avenues for growth or get some margins in place.

    Our preference is more towards that, that selective bias should give you double-digit returns, but as a whole, at a market view, our base case is no returns, the easier tailwinds-led growth which we saw over the last 24-30 months, it is not likely to continue.

    Where are you seeing value at this point of time? I would love to get any stock recommendations if you could talk about that, but if not, at least sectorally speaking, where do you see more value or quality at this point of time?
    I cannot talk stocks due to compliance restrictions, but what we define as value is value should not be in multiples, but in earnings. Earnings have a margin of safety is what we look for. Invariably if a stock has a low PE multiple, there is something wrong in either the terminal value of the business or the management quality or governance.

    So, we get wary when we see value stocks. We have invariably seen it quite vulnerable for a long-term earnings profile. We tend to see earnings being impacted and that can recover or even counter-cyclical earnings. Keeping that in mind, we think cement as a sector looks quite interesting to us, not every company but specifically.

    Banks are at possibly close to the peak of their margin profile, bottom of the credit cost profile. Even growth has been pretty good in the last 12 months. So, banks are close to the peak of their earnings profile, ROA profile, that is two extremes. IT is not yet constructive for us. We think IT will see more growth moderation as we get into the year. Industrials, domestic focussed can be good if we take a medium term (18 to 36 months) view.

    Industrials will be a sector where earnings can do well. The capex cycle will recover in that horizon. Earnings trajectory should play out for companies in the industrials, capital goods in that space. Discretionary consumption, pockets of comfort, pockets of discomfort. So, segments like autos, even there we think rural could recover this year over the next 18 months, urban could slow down. When we are weighing all of this, we look for companies where earnings have margins of safety. That is our primary focus. It is very stock specific. It is still very much possible to pick them with double digit or early teens return expectations, not what we got in the last two-three years.

    What is your take on pharma? The entire sector was derated. There was not a lot of stock interest, but finally there is a lot of news flow happening and the valuations look attractive.
    Yes, it does. The fact is after maybe two-three years, the FDA inspectors are back in and they are doing a lot of inspections and that should be one pocket of concern. It can also be a positive because some of these facilities which have been impacted for years can see recovery. But more than FDA inspection related outcomes, which is something that we can never predict, but what is interesting is the pricing of generics seems to be getting better at the margin there and that is our focus. We are trying to identify the overstocking and the excess inventory that we found in various levels, be it distributors and the hospitals and even the households in the US seem to be getting over and that is helping the pricing of generics in the US. That is one key positive which seems to have started this month and that is a good positive for the US generics biased pharma names.

    At the margin, things are getting better on pharma. We have been cautious on this sector for multiple reasons, inspections, pricing, even the extent of FDA approvals being higher is an increased supply that we had weighed for various reasons and we have been cautious. But you are right that pharma seems to be offering some margin of safety for sure.

    You talked that how capex and industrials are likely to do well this year. Narrow it down for us further. Is it going to be the infrastructure, the EPC play? Is it going to be the capital goods major, ABB, Siemens? Is it going to be manufacturing and stocks like Dixon, Amber, etc? What about defence? Which is the vertical where there could be the maximum margin of safety or value in your parlance?
    It is a combination of manufacturing and capital goods companies. They are not offering margin of safety as much as they did a year back but when I look at the next two-three years, earnings likely profile, they are possibly the best positioned. Product companies, specifically those with MNC parentage, where not only the domestic demand but also parent sourcing more from the Indian subsidiary, can give added growth impetus.

    That is our preferred pocket within industrials.

    What about the new age-tech companies -- Zomato, Paytm, PB Fintech? Would you like to be a buyer in any of these stocks? Are you looking at them positively?
    Not yet, we need to understand those companies better in terms of where those business models will ultimately settle down. These are evolving, very VC kind of business models and how the long-term profile of their profitable growth will likely be, is still undiscovered. We have stayed on the sidelines throughout this up and down phase and we thought let these business models settle down, then we will take a fresh stance. They have not yet settled down and we have not taken a clear stance.

    What about real estate because it was supposed to come out of a decade-long hiatus?
    Real estate demand is still pretty good. The new launches have not picked up the way we thought launches should have picked up by now. The excess inventory has got cleared, but the new launches, the pipeline seems to be okay but it is not yet as much as we thought. They should have picked up and maybe it will come, but demand is still good.

    The companies should be able to launch it over the next year or so. So, real estate is a rate cycle. On one side, it is a negative, but there is affordability. Since we have seen almost eight years of flattish prices, the non-resident Indians, given how the rupee has behaved, have been able to afford it better.

    Affordability is still very much there in spite of higher rates and that is driving demand and the excess inventory is getting cleared. So, real estate is a sector which we have liked, we have preferred derived proxies of real estate than real estate developers, derived proxies such as durables or it could be building materials, even cement to an extent or even housing finance. We prefer derived proxies of real estate than the primary developers.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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