Earnings to grow in mid-teens for first time in 7 years: ET Interview
February 12, 2018

Q. What do you think of the ongoing market fall post-Budget? What is your outlook?

After a fantastic year in 2017, there was a panic-buying-like situation unfolding in January. With the cost of capital going up, concerns about its sustainability have been around. When markets are positioned like this and most people are on the same side of the market, even a small development or event can lead to a sharp correction. This is what has happened. As we move to FY19, I think FY19 should see a mid-teen earnings growth, probably for the first time since FY12.

Q. Has the LTCG tax had an impact on the markets?

I don’t think so. LTCG, with the grandfathering clause, is not the reason for the current meltdown. The size of opportunity in India is just so huge that given the upside, LTCG is unlikely to discourage investors. Also, while markets such as Singapore and Hong Kong do not tax capital gains from equities, other developing markets such as Brazil, China and South Africa do levy this tax. Over five years, India is likely is likely to outperform other emerging markets (EMs), but this year, given macro headwinds and many elections, I think we might perform on par with other EMs.

Q. How much do you expect the Sensex to fall from the current levels? How comfortable are you on the market valuations?

It is always difficult to predict the extent of a liquidity led move on the upside and especially on the downside. It will depend a lot on global factors. I think lots of investors will find markets attractive around 9,800-10,000 levels of Nifty. I do not see this as a harbinger of a big meltdown. Nifty earnings (per share) are expected to be in the range of ₹580-600, which means it’s trading in the range of 17-18 times which is not expensive given the growth ahead of us.

Q. Do you think India Inc will rebound in Q4? Which sectors will lead the revival?

We saw good earnings growth in Q3 and this shall only get stronger in Q4. Metals, private banks and consumer (staples and discretionary) shall lead the revival. However, as we move to FY19, I expect earnings growth to be more broad-based. Last year, several distressed sectors like pharma, telecom and banks had taken a toll on earnings growth; excluding these, earnings grew approximately 15%. I believe, this negative contribution will now turn positive and a broad-based earnings growth is anticipated.

Q. What are the top macro themes that will play out over the next few years?

Among the long-run themes, there are four big changes which I am very bullish on. First, is the grey revolution embarked upon by this government. Over the next few years, we are going to see significant increase in spending on roads, railways, metros, etc. and affordable housing. One should certainly have exposure to companies in this space. Second theme is financialisation of savings. Today, there is an equity cult being developed among Indian households, and they are finally realising the importance of having financial savings, rather than physical. Third, is the fact that rural economy is on the mend mainly due to government support. The recent budget adds to my thesis that government realises the importance of developing the rural economy. It is only a matter of time before the rural consumption engine starts picking up. Fourth is the fact that global growth is picking up in a broadbased manner for the first time since the global financial crisis. This should help improve IT sector earnings – A sector which has massively underperformed and is trading on cheap valuations.

Q. Can you tell us about your upcoming Conference and the theme for this year?

This is the 13th Edelweiss India Conference 2018 and this year’s theme is ‘India 2025: Another Tryst with Destiny’. We believe India will make this tryst in 2025, when it becomes a $5 trillion economy, the third largest in the world. In the conference we are exploring the various themes and trends of opportunity over the next eight years. Our endeavor is to gaze into the crystal ball at the macro themes that will shape the India of tomorrow. We will have over 150 corporates and over 200 Institutional investors both domestic and foreign, deliberating on these opportunities.



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Vikas Khemani

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