Neelkanth Mishra, India equity strategist at Credit Suisse. Photo: Abhijit Bhatlekar/Mint
Mumbai: Neelkanth Mishra, India equity strategist at Credit Suisse, does not think that investors will be disheartened as demonetisation did not yield expected results. That said, Mishra does not see an earnings revival taking place at the rate consensus is currently anticipating, and warns that more earnings downgrades are in the offing, he said in an interview. Edited excerpts:
Demonetization seems to have failed as 99% of the banned notes were returned. Does one failed reform deter investor sentiment for India?
Markets are always forward looking, and they are not there to judge past developments. Investors don’t think ‘Looks like they made a mistake earlier, so they are going to make a mistake again’. The big changes such as RERA (The Real Estate (Regulation and Development) Act), GST (goods and services tax), Insolvency and Bankruptcy code are huge reforms, and they will be judged on their own merits.
Why are foreign institutional investors (FIIs) going slow on India? They have preferred other emerging market (EM) equities, more than India shares in recent times.
It is the constitution of the markets as well as the economies. In India, the economy has weaker global linkages than other EMs so stable global growth helps others more than us. Plus in the market we have sectors like banks, domestic consumer, IT and pharma that have significant weights that aren’t affected directly by global trends. In the other markets, there are a lot of oil companies, metal producers, and banks which have linkages to these sectors.
You said sharpest EPS (earnings per share) downgrades are likely to come in for FY19. Why?
It is partly driven by where earnings projections are currently. To cite an example, analysts project loan growth will rebound for banks to 10-12%, NIMs (net interest margins) will stay flat, asset quality issues will resolve etc. I don’t think so though. I think the loan growth will disappoint, NIMs will disappoint, due to over-competition. NPA (non-performing assets) issues will continue to demand higher provisions at least till FY19.
Downgrades will also be harsh for discretionary, pharma and staples sectors for FY19. Also, we expect FY18 consensus EPS growth of 11% to settle in mid-single digits.
What is going to be the theme for Indian markets for the next one year?
Stable global growth is going to be the driving factor for the Indian markets over the next year. That is where we would like to position ourselves. We also continue to expect interest rates to fall.
Recently, we had a founder-management tussle at Infosys. We also saw a spat at Tata Sons Ltd. Do you think this is tarnishing Indian companies’ image with investors?
No, these are in fact signs of maturity. These are questions which have never been asked before. We are not used to professionally driven management. This is challenging the traditional model in some ways. From now, we should see the transition happening as boards become more vigilant.
How long do you think it will take for Indian companies to get used to GST?
GST-led disruption in the supply chain will last for few more months even after September quarter. Given that GST is a big transition, it is not abnormal to take 9-12 months for things to normalize. As far as to and fro on GST rates and rules are concerned, I don’t think that would weigh on investors’ sentiments. One has to remember that markets are always forward looking and that is one reason why we saw muted reaction to cess hike on autos than what happened with cigarettes.
What is your outlook for the Indian rupee? Is further appreciation in the offing?
We expect rupee to strengthen going ahead. The sharp surge in India’s foreign currency reserves, according to me, means that the market is challenging RBI’s resolve to prevent the currency from appreciating. If the DXY (US dollar index) keeps dropping then it will be increasing problematic for RBI to hold at 63.8-64 against the US dollar. Rupee weakening against every other currency is also not wise.
In which sectors do you think valuations are stretched?
Valuation at which a couple of NBFCs (non-banking finance companies) are currently trading is worrying. In the NBFC space, there is lot of froth on the retail lending side. If one has to choose between NBFCs and private banks then the latter seems to be safer bet.
In which sector do you think valuations are reasonable?
We are comfortable with valuations of energy, metals and IT companies. Within energy, it would be state-run oil marketing companies. Valuation wise, there is no debate as far as IT is concerned. Though we expect the rupee to appreciate, from a weighted currency basis, they will still be okay because IT firms have exposure to European markets and the euro is appreciating. Concerns regarding visa issues in the US are baked-into the price for IT firms and now it isn’t clear if those concerns will fructify.