‘Investors are willing to bear GST pain for long-term gains’

With introduction of the goods and services tax (GST) Bill round the corner, a levy that will have an impact on how the economy and corporate earnings shape up over the next few quarters, MAHESH NANDURKAR, executive director and India Strategist at CLSA,

MAHESH NANDURKAR

What is your market outlook?

One can easily expect around 10 per cent return from the markets over the next year. Though this might not appear very high in context of the over 20 per cent return we have seen in the last six months alone, one should not hope for a repeat of such super-normal returns. As we are in a relatively low-risk rate of return environment, we need to tone down our expectations as well. The current valuations will sustain and I don’t advise investors to sell just yet, though the market looks expensive.

How will GST impact the economy and corporate earnings?

The June quarter numbers will see an elevated impact. What we hear and understand is that a lot of companies, traders, distributors and dealers are de-stocking inventory. This will have an impact on reported earnings and revenue, which will possibly remain in the September quarter as well. The situation, however, will normalise.

What are your views on the March quarter results and estimates for FY18 and FY19?

March quarter earnings continued to be weak. While overall earnings growth was in double digits due to low base for metals and banks, earnings at other domestic businesses dipped by around five per cent on a like-to-like basis. There was a lingering impact of demonetisation as well. For the first time after several quarters, Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins also dropped on a year-onyear basis. We should see buoyancy in revenues in FY18. We expect earnings growth of over 15 per cent in FY18. There is some risk on the downside in these estimates on account of GST. Even then, a growth rate of over 10 per cent is very likely.

What has been your investment strategy over the past year?

One sector we like is financials. It will be one of the biggest beneficiaries of the coming housing boom. This augurs well for housing finance companies. We like private players within the broad financials spectrum. The other sector we like is materials, which includes cement and steel. We also like select consumer discretionary stocks, including automobiles and the household sector.

What should investors do, given the stress in the banking sector?

We are at a crossroads as regards the banking sector. The farm loan waiver is a risk and we could see more states joining in. We will have to see how the states manage the overall fiscal situation. If this translates into the fiscal deficit widening, it will not be viewed positively by rating agencies and the markets. This will also impact the inflation outlook, and, in turn, the possibility of a rate cut. Having said that, resolution of the non-performing assets (NPA) issue will have a far higher leverage. If the government is able to get that part of the equation correct, the positives will outweigh the negatives.

Should one avoid public sector banks (PSBs)?

One should look at PSBs, which have the capability to raise money from the markets. Alternatively, private corporate lenders can also be looked at where one will get a similar benefit in case the NPA problem is resolved. One should not be adventurous and invest in small PSBs.

How are your foreign clients viewing India as an investment destination?

Foreign investors’ key concern has been valuations. While the Indian markets have given reasonable returns, they haven’t been the bestperforming markets globally. Among the emerging markets on a year-todate basis, Korea, China, and Turkey have done much better.

More, earnings revision in many other Asian markets has started to happen on the upside, which is missing here. We continue to see earning downgrades. Once we see earnings estimates stabilising and the expected double-digit growth coming through, we will see greater participation by foreign institutional investors as well.

INVESTORS ARE NOW LOOKING BEYOND FY18 AND FROM THAT PERSPECTIVE, THE NEAR-TERM DISTURBANCES THAT WILL BE CAUSED BY GST WILL ONLY HAVE A SMALL IMPACT ON INVESTOR SENTIMENT