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Auto, engg, FMCG Q4 may surprise positively: Sundaram MF

In the last week of the financial year, the investor community typically prepares for the quarter four earnings estimates. At the same time, global scenario appears due for a big change as global capital is realigning allocation in the wake of impending rate hike by US Federal Reserve.  S Krishnakumar, head equity, Sundaram Mutual Fund shares his views on the investment trends and macro environment with Moneycontrol.com’s Nikhil Walavalkar. In an email interview, Krishna Kumar says he expects small cap stocks to benefit from both an operating leverage and falling interest rate cycle over the 2-3 year period.

After the budget and rate cuts, fourth quarter earnings are expected to take center-stage. Do you see an earning uptick in fourth quarter? In which sectors you expect earnings surprises coming investors way?

Sequentially we expect the fourth quarter earnings to be better on year on year basis. Interest costs are coming off as corporates resort to market borrowings substituting the higher cost working capital from banks. An earnings growth of closer to 10% is estimated on the nifty, with benefits from the lower commodity price template seeping through. Companies that have power of brands and users of commodities are likely to surprise positively. Auto, engineering and consumer sectors are expected to surprise investors.

Crude oil prices are off the bottom they hit. What is your forecast on crude oil prices? Do you expect India benefit from the low crude oil prices?

India stands to benefit from lower crude oil prices in many ways – be it lower import bill, lower subsidy burden for government, better working capital management for Oil marketing companies. Corporates and consumers also are expected to save over Rupees 1 lakh crore with crude oil at USD 60 per barrel. This savings is definitely going to percolate into corporate earnings and consumers disposable incomes thereby impacting the economy positively.

Our belief is that the oil prices in the medium term could be more range bound between USD 50-65/bbl given the over-supply in the market.

Small and micro cap companies have done extremely well over last couple of years on bourses. How do you see these stocks benefit from the impending economic recovery? Or this space is currently too overvalued to invest?

Markets are going through a phase of consolidation which is a normal part of any bull market. BSE small-cap index is down on a 6 month basis which gives you a sense on softer valuations in small and micro caps. This segment is expected to enjoy the dual benefits from both an operating leverage and falling interest rate cycle over the 2-3 year period. Thus investors should continue to allocate a part of their equity investments into the high growth small and micro cap segments.

Interest rates are on their way down. How much more cut in interest rates you expect by first half of FY16. Do you find debt-laden companies interesting from investment point of view?

While the RBI has cuts the repo rate by 50 bps, our expectation is that another 50bps cut should be possible given the current real interest rates of about 2 to 2.4%.
On the attractiveness of debt-laden companies, one has to keep in mind the business fundamentals too which over ride just the balance sheet benefits.

Public sector banks are expected to be the biggest beneficiary of economic recovery and fall in interest rates. Is the worse in terms of non-performing assets over for PSBs? What are the triggers investors should wait for this space?

Personally I feel that the worst is nearly over for PSU banks from a negative surprise perspective. The problems of debt laden corporate sector are well known with high stress levels baked into the valuations of PSU banks. Rising economic growth is expected to ease the business environment and working capital / cash flows and relieve the troubles of the MSME and mid corporate space. Progress on infra and coal projects should also help. By March’15, almost all the assets that need restructuring would be addressed and expect the incremental stress accretion to recede. The sector looks attractive from a 2 year perspective

US economy has been disseminating positive news for some time now and US dollar is on the rise. Do you see this trend to continue? Will it help exporters in general, and IT in particular?

Given the differential growth outlook across the developed world and the contrasting monetary policies pursued, the current trend may not reverse immediately till growth in other big economies start looking better.

INR has been one of the strongest currencies in this region in the last year and is also significantly overvalued with reference to REER. This has led to some amount of loss of competitiveness in global markets.

US Fed has been talking about a possible hike in interest rates. Will this lead to flight of capital from India? Do you expect short term volatility in Indian financial markets?

It is certain that US Fed would hike rates while the timing remains uncertain. Global events such as these would definitely create some volatility in our markets too in the short term but do not see it leading to a significant flight of capital from India given the attractiveness of our markets. Further our forex reserves are much better than a year back and hence can be used by RBI to contain the volatility. Also the global liquidity remains comfortable given the QE from Japanese and European central banks.

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