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See tepid Q4 earnings; good stocks richly priced: Kotak Sec

Fourth quarter earnings is likely to fall short of market expectations, feels Sanjeev Prasad, Senior Executive Director & Co Head (Strategy), Kotak Institutional Equities.

In an interview with CNBC-TV18, Prasad sees risks to earning s estimates in the auto, metal, banking, energy and capital good sectors.

He expects aggregate March quarter net profits of Sensex companies to grow 6.3 percent year-on-year.

Kotak Securities has already trimmed estimates for companies in the metals and mining sectors, says Prasad.

Also, the brokerage has increased weightage of  Reliance Industries in its model portfolio, and reduced weightage of the technology sector.

Prasad says a pick up in investment cycle is still 3-4 quarters away, and making matters difficult for investors is that quality stocks are extremely expensive at current prices.

Prasad expects the US Fed to cut interest rates in September as data suggests that the recovery in that country is not as strong as projected.

Below is the transcript of Sanjeev Prasad’s interview with Latha Venkatesh & Sonia Shenoy.

Latha: Pass the global cues for us, we got that bad non-farm payroll number. Is this likely to mean some near-term negativity for all equity markets?

A: Keep in mind the fact that its only one month’s data but having said that of course the previous two months numbers also got revised downwards. So to some extent it is indicating that the economic recovery in the US is not as strong as what the data earlier suggested which means that the US Fed may not be in a big hurry to cut rates; anyway June is very unlikely and September is what most people have been talking about as of now. So that case still holds but it would be data dependant so we will have to wait and see what the next couple of months’ data suggests.

There are negative implications of such a strong US dollar as far as US economy is concerned, there were some weather related issues also so may be it is just one or two months of weak data but let us see how the next couple of months’ data pans out and that would be a better indicator as to when the US Fed will want to act in terms of raising the rates over there.

Sonia: At least that near-tern negative is ruled out for the Indian markets but as our previous guest Mark Matthews was saying India has its own specific problems with respect to weak earnings and high valuations. What is your expectation of how this earning season will pan out and what the market reaction could be to that?

A: The quarterly earnings will be quite bad once again. As of now whatever preliminary numbers which we have suggest, we are looking at about 3 percent year-on-year (YoY) growth for the BSE 30 index numbers, which was pretty much expected. If you look at our full year numbers, it was anywhere down to about 3 percent for the BSE 30 Index and about 2 percent for the Nifty 50.

The more important thing to watch out in earning numbers is what is happening to gross margins. Everybody knows that volume numbers are weak but the other leg which has been keeping this market somewhat hopeful is improvement in gross margin because of lower inputs/commodity prices. If you don’t see a big translation of lower commodity prices into expansion gross margins and in-turn improvement in earning numbers then there could be some scope of disappointment.

However, the volume part is very well known. What I would like to watch is what is happening to the margins front because there are lots of expectations around that about some improvement in margins because of lower commodity prices and plus some benefits for auto companies because of the way yen has depreciated against the Indian rupee.

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