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See FMCG cos, private banks report good nos: Edelweiss

The earnings season is widely expected to be subdued this quarter. Weak rural demand, contraction in government spending and cross currency headwinds look like the major culprits behind the slowdown in corporate earnings. Will market see a bottom in Q4 or will the weakness continue? In an interview to CNBC-TV18, Nischal Maheshwari, Head – Research, Edelweiss Securities shares his views on the same.

Below is verbatim transcript of the interview:

Q: Fourth quarter will be a bad quarter but how bad? Is it going to be an ugly quarter or do you think there is still some hope?

A: Yes, relatively it is going to be an ugly quarter particularly looking at it in past two or three quarters we are seeing this performance quarter after quarter going down for the corporates. This year again you will see around 4 percent downside in the topline and another 5 percent downside in the bottom line. So, it is going to be challenging again.

Q: The obvious follow up in that case will be the worst quarter or is that something that we could see maybe in the Q1 of next financial year or Q2? Is it going to be the bottom quarter?

A: It is difficult to say for the reason that the major problem that we are seeing in the last two or three quarters is the topline growth and I do not see strong signs of growth in demand actually and until and unless you see strong recovery happening on the demand side I don’t think it would improve dramatically from here.

Q: Would you say most of these rather dismal expectations from earnings have already been baked into stock prices or are you expecting that we are going to see some more disappointments and therefore, more pressure on stock prices on the markets?

A: Whenever the numbers hit the market the stocks react in the short-term but on a medium-term basis market is expecting this kind of a bad quarter. We have only 3 percent earnings growth for FY15 and when we started it was almost close to around 11-12 percent growth so you are putting a lot of hopes on FY16 that the recovery will be sharp and is going to be sort of reshaped and that is why you can sustain these kind of higher levels in the stock market.

Q: Which sectors will do better than others in this season factoring in the impact of lower demand or what is going on in the currency markets?

A: I did not get the question.

Q: Which sectors do you expect will do better than others factoring in the slower demand and factoring in things like for instance the currency market movement?

A: Among domestically focused sectors you will see non-banking financial companies (FMCG) and private sector banks once again chipping in on the positive side.

Q: You expect that lower demand will hurt numbers even further. FMCG has been plagued by low volume growths. How is it that you expect that they will do better? Is it only on the back of better input costs, lower input costs?

A: Actually, lower raw material cost. That’s why they are going to be on the whole and earnings before interest, taxes, depreciation and amortization (EBITDA) margins will be improving on the Sensex basis as well. This is because your raw material cost has gone down dramatically. That is why you will see, though you may not see, maybe strong top-line growth as far as FMCG is concerned but the bottomline will be robust again for FMCG.

Private sector banks will do much better than their public sector counterparts. I would have also expected pharma to do well but because of one-offs in some of the larger stocks like Ranbaxy and all, the sector as a whole, the performance has been pulled down.

Q: What about IT? That is a big number coming in on Thursday.  TCS will kick-off the IT earnings season.

A: IT would also be slightly negative for the reason that you have a cross currency and the currencies especially across the world and European currencies have actually declined and so is the dollar. You are also going to have that impact coming in for IT.

Q: It is just two sectors where stocks have done remarkably well. Telecom and real estate and there is a good chance that both sectors come out with decent earnings. How are you positioned on both these sectors?

A: Telecom, the big event has passed and that was a relief rally which has been in the market. Most of these stocks have been pulled down quite a bit, so you see both these stocks; Idea and as well as  Bharti are running up almost 10 percent.

Going ahead, what we have to see is the kind of landscape that gets spilled given that we have already put I so much cost on the ground. Whether government allows them to have a market driven pricing for data as well as voice and they will be able to take an appropriate hike in the voice and data does not seem to be possible basically if I read various comments from the government sources.

It is a big question that you want the companies pay market driven prices but the companies cannot charge market driven prices when their output is concerned. So, that is going to be a continuous overhang on this sector.

Capital expenditure (Capex) is a continuous overhang on this sector again in the next year the 3G auction is going to happen. This kind of capex is continuously going to pull down the return on equities (RoE) for the companies. This will at best be a trading sector more or less and seems to be a top-out as far as telecom is concerned.

Q: What about cement because the stocks have done well but the earnings are yet to catch up and does it look like in Q4 the cement earnings will catch up or will it be another quarter of disappointment?

A: No, I do not think so. Cement will continue to disappoint in the current quarter as well. What the market is building in is basically that 16 and 17 year given that government is spending so much on infrastructure and so, the demand will surprise everybody.

Most of the analysts right now are putting around 78 percent kind of a volume growth. But if the demand goes 10-12 percent, then there will be a positive outlook as far as cement is concerned and 17 definitely the capacity utilisations are going up for the industry as a whole and for the North based companies quite a bit. So, that is why you are still seeing that their stocks have performed well.

Q: What about capital goods, construction and all these companies because we have BHEL ’s flash numbers but the more important stock to watch would be  L&T and maybe even companies like  Crompton Greaves and the kind of companies where we have seen big rally in stock prices, all the infrastructure companies, what kind of earnings would you expect there?

A: Given that the recovery cycle has just begun and you have seen interest rate cuts happening, I don‘t believe that the earnings are going to come so soon for any of these companies and the market also does not expect it.

The initial stages that the market will be looking out for is how the order book grows and whether those orders are highly competitive, are people still bidding at 6 and 7 percent kind of EBITDA level or are they now normalising to 10, 11,12 percent kind of EBITDA levels. That is where the focus has to be and we are seeing some healthy growth happening as far as the road construction companies are concerned given their government focus on that.

On the capital goods side I’m yet to see strong order book coming in and that could be a bit of disappointment if the order books do not come in because the stocks are very aggressively priced.


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