Consensus earnings estimates high and need to be toned down: Mishra

Neelkanth Mishra
Neelkanth Mishra, managing director - equity research, at the Indian arm of financial services multinational Credit Suisse, believes the earnings estimates for FY17 and FY18 should see increased downgrades. Edited excerpts of a talk with Sheetal Agarwal:

What is your outlook on the markets for 2017?

India has underperformed over the past two months by 10-11 per cent in dollar terms. Within Asia, we are the only ones to see a fall in foreign flows. The MSCI India price to earnings ratio (PE) is actually trading at a discount of one to two per cent to the MSCI, versus the usual 10-12 per cent premium. 

Rather than calling Nifty levels 12 months forward, I would advise investors to be in a few sectors and stay away from the others. A weaker real estate market, a stressed banking system, uncertainty around GST (goods and services tax) implementation, and disruption due to  shift from unorganised to organised sector means expectations have to be brought down. Earnings growth estimates are too high and need to be toned down.

I don’t expect PE multiples of the market as a whole to expand. The consensus earnings growth number for FY17 and FY18 is very high.

What are your Budget expectations?

All we know is that it might be an incredibly complex one, due to a host of factors. They are working with very shaky Gross Domestic Product projections. Though the tax numbers have gone up, no one knows if these are sustainable. Second, planned and unplanned expenditure categories are merging and that has to percolate through to a number of departments and their spending behaviour. 

Then, they are merging the Railway Budget, a huge expenditure item and very complex. There is GST, where we don’t even know the rates or implementation time line. Finally, if the government accepts the recommendations on FRBM (Fiscal Responsibility and Budget Management), they will have very little time to incorporate these in the Budget document.

My own sense is there might not be too much of adventurism in the Budget. Corporate tax rates will come down to 29 per cent this year. 

How prepared is India Inc for GST?

Very badly prepared. There is a view in the government and among corporate groups that you can’t be prepared for such changes. Instead of focusing on growth, companies will have to focus on implementation of GST, training of their staff and the entire transition process. This will lead to slowing investment demand. 

Which sectors do you find value in?

We prefer non-India focused companies over India. There are still too many structurally negative trends in health care. The information technology (IT) sector has de-rated the most in the past five years. Global cyclical recovery means their fundamentals should stop deteriorating. There is a fear around visa issues and taxation issues in the US, key overhangs. We cut our exposure in cement, discretionaries, NBFCs (non-bank financial companies) and allocated those funds to IT, where we are marginally overweight. 

We prefer housing finance companies, as they will be the biggest beneficiaries of lower interest rates, which can push up their volumes. We will buy private bank stocks when they correct. We are underweight on staples.

Over five years, NBFCs, consumer discretionary and cement sectors have witnessed strong but unjustified expansion in their one-year forward PE, compared to their earnings growth. We think these sectors will disappoint investors fundamentally over the next 12 months. One justification for the high multiples for the longer term in these sectors was lower global bond yields. With bond yields in the US rising, a perpetually high PE multiple will be questioned. Many of these stocks will also go through a time correction. 

You believe the government does not want public sector banks (PSBs) to grow. Could you elaborate?

The government's assumption while allocating capital to PSBs seems to be that they will not grow faster than the banking system. There has been a very slow progress on appointment of leaders. It suggests they don’t want these banks to fail but are also not encouraging their growth. A lot of privatisation has happened through the private players gaining share in a growing market. I think the banking system is heading that way. It is very hard to privatise them (PSBs), due to strikes, political pressure and similar issues.


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