Sanjeev Prasad, Kotak Institutional Equities


Are you telling your clients that right now they should take it easy for the next six-eight months? A lot of the projected gains for 2017 are behind us now because frankly when we started the year, it was expected to be a dull year, it has turned out to be a dream year. Markets have done much-much better than what anybody thought?

We do not know how the year will turn out to be. So, hold on to your assumptions that it is a great year we still have 4-4.5 months to go, you know if we end this way, we should be fine because incrementally, earnings have to come back. So far, we have been moving along with global factors, that is the point over here. And unfortunately we are not seeing any signs of great revival as far as earnings go. If you look at our March 2018 numbers that is down to about 3.5% now, that is hardly something which we would be excited about and now the entire growth seems to have shifted to fiscal 2019 and it is becoming a rolling 12-month thing for the last three-four years.
Every year, we start with a high set of earnings numbers and then we start seeing progressive earnings cuts and then we are back to square one in a sense.

Let us see whether we will see any meaningful recovery as far as the economic activity is concerned and on the back of that some improvement in the earning numbers. As far as global factors are concerned, so far they have been fairly supportive.

But having said that, I do not know whether things can incrementally become more negative. Do keep in mind the fact that US dollar has been pretty weak and that is one of the big sources of drivers of markets everywhere. As far as other markets are concerned, in dollar terms everything has started looking a lot better, you have started seeing more money going out of the US into other markets.

But having said that the dollar has come off very significantly over the last seven months starting from early January so I do not how much more the dollar has fall from where we are. And there is a very inverse relation between US dollar and the performance of emerging markets so if you start seeing some movements as far as the US legislative agenda is concerned, you could start seeing some strength in the US dollar and US bond yields which will not be definitely positive for emerging markets in general. Having said that at least (23:51) looks like US is having extreme form of dysfunctional politics, I doubt anything will change in the next two three months in a big hurry so we could see this situation continuing. China seems to be improving actually fairly stable actually over the last two-three months most of the macroeconomic parameters over there. Europe is recovering. So the global backdrop looks okay I would say. As far as domestic conditions are concerned, everything is pretty decent except for I would say growth in the investment part of the economy and earning numbers, valuations are not supportive. That is a problem but that has been an issue for the last 12 months. Look at the overall market valuations at about 18.5 times on a 12-month forward basis. It is definitely not a cheap market and the sectors which we would want to know, basically the consumption basket and financing of the consumption basket through private retail banks and some NBFCs, are clearly on the higher side. It is a tough market honestly, not much of a catalyst. Valuation is on the higher side but there’s no big negative event also out there barring some geopolitical thing which none of us can forecast. It looks like we will just meander along for some more time.

Where do you think the next trigger is going to come in from because cues are drying up, we are almost at the fag end of the earning season you are done with the RBI policy. The GST transition is done. God knows what is the next big reform going to be? At least for now, GST seems to be it, up until the teething problem seems to be getting ironed out. Do you think that we will continue to track the global cues in the meantime and like you said the big factor could only be if at all you see any more noises being raised with regards to geopolitical tensions between the US and North Korea?

In the domestic side, I do not see any meaningful cues. Everything is good in the sense that you have economic stability, political stability, fairly supportive conditions. What more reforms does this government need to do? It has already done a fair bit. I guess we need to see the benefits of some of the reforms going forward. All the taxation reforms are largely done; expenditure side reforms are mostly done. Eventually we move to direct benefit transfer of subsidies on even food at some point in time and so that could be one big piece out there.

On the banking side, most of the reforms are already in place in the sense you have IBC, the NCLT is already dealing with the 12 large cases, already 25% of the NPLs are being looked at by the NCLT. In financial inclusion, a lot of progress has been made, ease of doing business again, most of the reforms seem to be already in place barring labour reforms. That is something which this government will probably do in the next term assuming it comes back to power in April-May 2019 elections.

We just need to keep on doing the same thing as far as the economy is concerned. Hopefully, at some point in time, there is sufficient confidence among the private sector to start investing in and on the back of that, you start seeing job creation. Otherwise, over the next 1-2 years, I see the same pattern of economic growth that is driven by consumption and government expenditure.

ET Now: Give me a large-cap stock where you still feel that 15% to 20% CAGR returns can come in next three-four years?

Sanjeev Prasad: For 15-20% CAGR returns, you could look at some of the corporate banks such as an ICICI or SBI. From here, you have to look at anything which can have some amount of compounding as far as earnings or book go and some amount of rerating.

There were a lot of companies which will deliver some amount of earnings growth over the next three-four years and that is not a problem. The problem is many of these good quality companies are sitting on very high PEs and very high profitability and margins.
Even though we are positive on the volume growth part of it as some of the benefits of reforms start coming through, you start seeing a recovery and along with that will come volume growth. But the risk we run is you will run into the headwind of some de-rating in multiples as we go forward and that could take away a lot of sheen in terms of poised performance even though you will have earnings growth you may not have that level of stock performance in some of the high PE stocks in the consumption basket, staples, discretionary even some of the private retail banks. We are already sitting on very high multiples and very high levels of profitability.

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