'Market likely to stay buoyant over the next two years'

Sankaran Naren
With the March quarter earnings season just round the corner, Sankaran Naren, executive director and chief investment officer at ICICI Prudential AMC, tells Puneet Wadhwa that corporate earnings may see a meaningful pick-up in 2018-19 across sectors, except in oil & gas and metals, where growth is likely to be visible in the current financial year itself.

With the markets already at all-time highs, does the rally have more legs?

We are in the midst of an (uptrending) economic cycle, and the markets have gone up much faster than the change in economic cycle. Going ahead, we need to see much more capex, credit growth and improved confidence on the part of the industry. 

Another reason for the rally has been the continuous thrust on financial savings over physical savings by the government, which is favourable for the economy since money is flowing into productive assets. The market is likely to stay buoyant over the next two years, as revival in the economic cycle could take that much time to top out. In light of this, we are not worried about the current market levels.

Are we being over-optimistic about an improvement in earnings and revival in the capex cycle?

Economic cycles take time to revive. We are not worried about the earnings cycle recovery, as we know it can come in over the next two years. We are confident that many of the problems which have existed in the banking system for the past five years are being addressed. When it comes to capex, the government spending is underway and can be followed by private capex as the capacity utilisation rate improves.

What are your expectations from the March quarter results? 

I don’t think there is any big expectation from the March quarter numbers. Banking and telecom are likely to be laggards, while sectors like information technology (IT) will be under pressure, as the currency may impact negatively. Metals may show an improvement on year-on-year basis. At the same time, I don’t think we are in for a news-based improvement in earnings, at least in the near term. 

Can you elaborate on your earnings projections for the next two years?

Earnings may go up by at least 20–25 per cent. We believe that the worry for the market should be after earnings and not before. Once they do come in, investors can tend to put a higher multiple on the expanded earnings, which may present a misleading picture. Earnings, without doubt will be a major trigger for the markets, and when companies do deliver on this parameter, it may prove to be a tipping point. We believe corporate earnings may see a meaningful pick-up in 2018–19 across sectors, except in metals and oil & gas, where growth is likely to be visible in the current financial year itself. 

Which sectors are you overweight and underweight on?

Infrastructure-related sectors will be better off over the next three years, as there has been a meaningful de-rating here over the past 10 years. Companies in this sector are the survivors and the business prospects for them are superior without the threat of new entrants. 

Within the infrastructure sector, how do you view the road ahead for realty?

We have not found any meaningful investment opportunity in the listed players in the real estate segment. The way this sector operates requires change and consequently we might consider this space once these changes are implemented. Currently, we like roads, power utilities, ports and telecom.

The RBI has allowed banks to invest in Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs ). What is your view? 

The move is positive for both banking and realty sectors. However, there is learning required on how to analyse Reits and InvITs and this process will take time for the financial community.

In which sectors do you find value from a two–three year perspective?

Clearly, it is the large-caps because theyhave seen de-rating of earnings. As a result, we have been believers in this basket. However, we also believe that the domestic cyclical laggards of the last 10 years look to be better opportunities than global defensives. 

So, what’s your advice to investors at this stage?

We would be worried if retail investors were to blindly switch from fixed deposits to a pure equity-oriented product, as the risk associated with fixed deposit is very different from that of a pure equity product. The current market cycle is in favour of equity investing, at least for the next two-three years. We will be worried when the economic cycle reaches its peak levels.

What’s the road ahead for telecom? 

The consolidation announcements have already been made and it will take two – three years to implement. In three years from now, the industry structure is likely to be much more robust than what it is today. So if one wants to invest from a three-year horizon, the sector looks attractive.

Can the D-Mart IPO’s success change the way investors look at the Indian retailing industry?

Being a mutual fund, we do not comment on individual companies. I think the real challenge is that we need to get a retail model that works. In India with real estate being so expensive, it has been difficult to get that model right. If one can get the right model, there is a huge scope in retailing. This is one segment which has been in search of business models that work.

Does it make sense to merge the oil & gas (PSU) behemoths?

When oil prices were low – nearly a year ago – Indian companies could not make use of the situation to buy significant oil assets abroad. If you create an oil behemoth and you have a fall in oil prices, maybe there will be better equipped to buy assets abroad, as we may be in a better bargaining position. Having said that, the view appears to be that oil is not headed for a spectacular rally due to the influence of shale companies. Oil prices, I feel, may be capped between $60 – 65/barrel.

What’s your view on the banking and the non-banking finance companies (NBFCs)?

We are of the view that both these sectors are at the bottom of the cycle. We have low credit growth, low net interest margins in the aftermath of the provisioning of old Non Performing Loans. Over the next six months, banks earnings cycle is likely to bottom out. From thereon, from a three-year view, this sector is likely to revive and may end up leading the earnings revival cycle in 2018 – 19. 

As regards NBFCs, this space is not cheap any longer. Their boom is being linked to the fact that banks have not been lending in a big way. While NBFCs may have good growth prospects in the near term, we do not see value here. Banking sector, in effect has good long term prospect but with near-term problems.

What about information technology (IT) and pharma stocks in the backdrop of developments in the US and the outlook for the rupee?

IT has become a low-growth sector, but with good balance sheets. This makes them defensive in a declining market, and a low-return prospect sector, in case of a market rally. As regards pharma, there are problems, but it’s largely company specific in nature. If these problems get resolved, we are likely to see a meaningful rally in this space. 

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