Q2 reflects cyclical improvement in growth & earnings

The market is riding on strong macroeconomic fundamentals and this growth would continue, giving retail investors an opportunity to participate in this growth, says Arun Thukral, MD & CEO, Axis Securities. In an interview to Sangeetha G, Thukral says the pace of NPA revival is critical for the economy’s revival. He also believes Jerome Powell as the US Fed chief will be good for the Indian market.

How do you evaluate the Q2 earnings season?

The earnings season so far have been better than expectations. The concerns about supply chain disruption post-GST implementation has been put to rest with companies reporting flat or positive volume growth. Mid- and small-cap firms seem to have do­ne better than top-tier companies that form part of the index. The Q2 performance reflects the cyc­l­ical improvement in growth and earnings, aided by government reforms and an improvement in global growth conditions.

What trend do you find in the divergent performance of banking stocks? What does it say about the economy?

The recent stimulus from the go­vernment will go a long way in su­pporting the public sector banks that were reeling under the pressure of NPAs. The private sector banks have slightly disappointed the markets on account of excess provisioning for the NPAs. So markets responded positively to the public sector banks due to the visible light of NPA resolution and was negatively surprised due to provisioning by private banks. Hence, there was the divergent trend amongst banking stocks.

The credit off-take from the corporate sector is meagre, however, retail off-take is indicating strength. In the last four to five quarters, profitability of PSU banks was primarily driven by bond portfolio, which aided them to take higher provisioning. This quarter, lack of credit growth, high provisioning and low treasury gains weighed on their performances. However, net interest margins were stable. There are signs of asset quality stress alleviating with lower incremental slippages. With the insolvency board in place, there is a fast track mechanism for settling recoveries and also we see more number of PSU players keen on faster resolution of NPAs, by bringing their stressed assets on the table.

Revival of the economy will largely depend on the pace of resolution of NPA issue. Lower additions to fresh slippages hint at gr­e­en shoots of recovery in the syst­em. The increased availability of capital after the recapitalisation move should help to accelerate the stressed assets recognition and equip banks to get in shape to lend to help revive capex cycle.

Looking at the performance of consumer goods stocks, do you think the consumption cycle has revived? Or are the good numbers just a matter of re-stocking post-GST?

Q2FY18 performance of FMCG and consumer staples stocks are indicating that volume growth has come due to 1) re-stocking post GST, 2) normalisation of trade pipeline across the channel (retail and ‘modern trade level’). In wholesale 80-85 per cent of the channel is back and canteen stores channel is witnessing some comeback after having witnessed slowdown in business from July up to September. While, these are primarily due to GST, we believe that growth opportunity and headroom for incremental gro­wth for consumer driven companies is large in rural India where one can expect volume growth to come in faster than expected, driven by government stimulus, hike in MSPs for rabi crop and other such schemes.

The consumption cycle is here to stay and in H2FY18, we could see a much better performance in terms of volume and value growth, also partially aided by low base of last year (impact of demonetisation). Given that India is a consumption driven economy, over the longer term the trend is here to stay as the Indian consumer is evolving by the passing year, and demand higher end products. Thus, focus should shift to the long-term sustainable trend rather than intermittent hiccups caused largely from reformist measures. The same is re-iterated by managements of consumer-based companies.

How will the selection of Jerome Powell as the US Federal Reserve chairman will affect the monetary policy?

The appointment of Jerome Powell has been positively taken by the US markets, as he is likely to provide monetary policy continuity by adopting Janet Yellen’s framework of gradually normalising interest rates and predictably reducing the Fed’s balance sheet. He is also likely to be more receptive to calls for adjusting financial regulation prudently, especially for smaller banks. Markets like continuity of policies and there are no negative surprises with Mr. Powell taking the new chair.

How will a change in policy affect global markets, including emerging economies like India?

Monetary policy tightening in the US could lead to capital outflows from emerging economies, affecting their current account deficit. But India would be better off co­mpared with other emerging ma­rkets due to fundamental stren­gth. In the event of hawkish view by Fed, markets may see a correction and domestic institutions could use every such dip as a buying opportunity. In the event the hikes are done on an accelerated basis, it could likely lead to rupee depreciation, due to the cascading effect on all emerging mark­e­ts. Import-oriented firms could be under pressure with a weaker rupee, whereas export-oriented industries will benefit from favo­urable foreign exchange gains.

We are hearing positive and negative news from China. How will this affect movement of industrial metals and the performance of our metal stocks?

We are seeing some uptrend in cyclical sectors, largely metals. There have been multiple factors for the same, however, the most important is the China factor. The bull run in metals is likely to sustain due to China’s Belt & Road initiative where it plans to build and strengthen overland and sea corridors linking Asia to Africa and Europe. This is a big project and will augur well for commodities across the world. Another important aspect is the stringent norms towards environmental pollution imposed by the Chinese government on steel industries. In its efforts to reduce environmental pollution and thereby improve quality of life, the government has asked steel plants to shut down operations in the seven months of winter. This essentially means that China will need to import large quantities of commodities like steel and iron to carry forward its infrastructure (commodity intensive) initiatives and investments. Prior to pollution curbs by China, it would consume 40-50 per cent of most industrial metals, even as it is a large producer. For instance, it accounts for 50 per cent of global steel production. This will be beneficial for Indian metal companies as it will lead to firming of global commodity prices.

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