What is your top-most concern about the market? Do you think that we are likely to remain in a tight range?
Yes. The fact remains that we are very close to the range that we had discussed the last time I came on your show. My expectation was that we should be anywhere in the range of 10,400 to 10,600 and on the lower end, we should be at around 9,600 to 9,800. The reasons are simple; one is that 35% of the entire Nifty portfolio is comprised of financials and my personal feeling is that financials would not be coming out with great results for the current quarter.
Even the advance tax numbers that both Axis Bank and ICICI Bank have put in were not great. There are upward pressures on the interest rates that have been there and that indirectly will also affect NBFCs in giving solid results.
So, you have problems as far as results are concerned and the entire Q4 results are yet to come out. That is one portion of it. Apart from that, we had and continue to have a major concern as far as crude is concerned. We expect an upmove in crude prices in the next five to six months which will also coincide with our election season.
And upmove in crude prices affects inflation and also chances of rate hike come in. So, there are a lot of headwinds at this point of time. I would love to see a good result season but I expect it to be muted rather than being better than what we have seen in the last two quarters.
Most on the street believe that net-net, the earnings season would be neutral to slightly on the positive side. What are your thoughts going into FY19? Do you see 15%-17% kind of earnings growth coming in for indicative purposes? At least do you see Nifty earnings for FY19 gather pace from hereon or can one not really take a clear call still on FY19?
Our feeling is that it will be in the range of around 12-15% preferably on the lower end of the spectrum, than on the upper end. We have had considerably tough times in this quarter. The FIIs are selling continuously in the market because the valuations are still high and earnings have not caught up at this point of time. The only way that can happen is if we do not expect earnings to go back to 15-20% which we have not seen for the last five, six years.
At the current valuations, we would probably be at the lower end of the spectrum than at the upper end as far as the earnings is concerned.
Lets divide the private sector banks into corporate private sector banks and retail private sector banks and of course a mix of both. The retail private sector is doing very well both stock price wise as well as on the business side. The private corporate banks are not doing well either on credit growth side or on the stock side. Do you think that in the next six months, a bottoming out may happen on the corporate private sector banks and the leadership of retail private sector may actually reverse?
Frankly, after the Q2 results had come out, we were more or less confident that the entire corporate bank pack had ended up bottoming out. The NPAs had slowed down and there was a slight increase in credit offtake.
Unfortunately, the Q3 results turned it on the head and post that, you had the PNB crisis. The fact remains that private sector banks and the NBFC pack both are going to benefit because of the slowdown in credit offtake from the public sector enterprise which is in a worst state than the private sector banks.
The corporate banks pack will end up with a bottoming out effect once the NPAs are declared and they start looking for the next level of growth after raising money which is going to be reasonably large.
Retail will continue doing well because both HDFC and Kotak — the pure retail players – have managed to keep NPA under control. There is a clear opportunity to make a clean 14% to 15% return, CAGR at least for the next two or three years and having better results once this entire economy picks up a little more.
So, preferably at least for the next one year, it is still a retail play which is going to be there. The corporates will take a little more time before they find their feet. A lot of them had to sell off assets to end up ensuring that they come out of the NPA crisis that is there or they are on the verge of default.
All this cleaning up will be done over the next two or three quarters. Corporate banks taking off in a large fashion except for the ones which has been beaten down because of news will take some more time. So, it is a better play to end up having a retail bank in your portfolios. Be happy with the conservative 13% to 15% returns that you get from that entire space and be safe. If you are the adventurous kind, then obviously you can look at and find an opportunity to slowly build the portfolio on corporate banks which will give you results in 9 to 12 months.
What is the outlook is from a sector perspective? You have seen the overall private capex picking up, the government thrust on individual sectors have drive manufacturing and factory order recovery as well. What is your view on companies such as L&T, BHEL etc. Any numbers that you are pencilling in when it comes to the earnings as well?
The pickup stated in the last quarter. The road network has shown that practically a double bidding has happened and the disbursal has come from the government side. The three sectors that we have liked and for the next one year focussed on are — infra, consumption space and the rural theme.
We believe government expenditure into these segments will happen. The way the infra projects have started flowing out, my belief is a lot of capital goods companies including L&T which is the largest play, will end up having extremely large books.
The other smaller players will also do well. L&T will end up giving a return of approximately 15% to 16% for the next two or three years but the smaller players like Sadbhav, Dilip Buildcon are the ones which will end up having a multiple effect because the size of their balance sheet is small. This smaller players will give you a large alpha on your portfolio but the larger players will end up giving you your subdued returns because their base is already large.