Margins at 15-year low; expect earnings to pickup in H2FY16
Aditya Narain, MD & India Strategist, Citigroup
Jan 06, 2016 | Source: ET NOW
• The overall market is going to struggle to perform at least in the early part of the year. There are, of course, pockets which are doing well. You have to identify those pockets and buy into them. In a broad brush, if you ask me, midcaps are actually looking more expensive than largecaps. But when the economy starts turning, midcaps are the ones where the earnings growth could be much sharper than the largecaps. The economy is recovering very slowly for people's comfort. But it is recovery and by the time we end the ongoing calendar, we will be talking of robust economy, better earnings growth than what we have seen in the last many years.
• On CMIE data on capex spending: Basically today, private sector is sitting on low utilisation rates, which should pick up. A part of the reason why the capex recovery is not going to happen as quickly as people are expecting is the fact that utilisation levels are still very low. You do not go and spend on new capacities, when you are sitting on utilisations, which are not at optimum levels. • On earnings recovery: It is not going to be even. There are global factors, which are going to weigh in on earnings. If you just look at our Sensex earnings, on a broad brush, around 40-45 % of it comes from global markets, which are actually going to drag down earnings going ahead. So what you are hoping is that the domestic part of the economy would start doing well and a huge operating leverage would kick in. Margins in India are at some 10-15 year lows. That is when the margin recovery starts coming in and you get a bit of top line recovery. We start every year with expectations of 15-20 % earnings growth. But we end up logging 3-4 % growth.
• On Earnings growth going forward: probably in the second half, we would actually start seeing earnings growth which is 8-10 %, then 12 % and 14-15 %.
• From the government also, there are pockets where spending is coming. There is nothing which is going to happen in power in the short term. In steel, nothing really is going to happen. Defence, railways are some of the sectors that seem to be taking off now. So you have to hope that they continue to take off and then you have to hope along the way the momentum starts building up.
• Themes that will play out: It will be a year where urban consumption will pick up. So with the pay commission hikes, low inflation and, thus, interest rates, that is one theme which will continue to look interesting. It is not a new theme; it has got played out. You will probably see autos doing well during the course of the year. Second way to play this consumer theme is picking private sector banks. Some part of roads, railways and capital goods are going to do well. It is going to be a mixed bag for capital goods companies. So it is not the traditional power equipments makers and suppliers, it would be the road sector and select companies which are not deep into debt which will benefit. That is probably the other theme which will play out.
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