Reduction in provisioning helped few corporate banks report better profitability: Arun Thukral, MD & CEO, Axis Securities

Markets seem to be trapped in a very narrow band right now. Do you see this range bound kind of scenario continuing until the elections?

We believe the markets will continue to stay range bound and the volatility will remain high in the near term. Domestic political uncertainty is a major reason for this along with global tensions such as the US-China trade war, Brexit etc. Lower than expectations earnings growth has also been a significant reason for this subdued performance by the markets. In the next few months, in order for the markets to see some kind of breakout from this band, we need to see some really good growth in the earnings over the next few quarters. A stable government at the centre (irrespective of which party wins) along with concrete corporate earnings growth is important for the markets to regain its growth momentum.

Small & Mid Cap indices continue to look quite bearish as we head into 2019. Despite a steep correction, valuation multiples for small-cap indices remain as high as they were in January 2018. Is this a concern for you?

As the volatility is expected to remain high in the first half of 2019, we expect the midcaps and small caps to underperform as the investors would look to hide in the large-cap stocks for safe-haven. In 2018, the BSE Midcap index corrected by ~13% and the BSE Smallcap went down by ~24%; we might see some more correction this year. Barring a few midcap counters, the valuations in the majority of mid and small cap space still seem stretched at the moment compared to their large-cap peers. We would have to wait for the results to come in and check for the earnings growth in this segment. We need to see substantial growth in the results in order to justify these valuations. 

What’s your take on the Pharma sector? A number of Mutual Funds have shown interest in this space recently. After a brief revival, it seems to have become subdued again. Do you think Pharma is a good long-term bet at this stage?

For the past few years, the Pharma sector was primarily affected by US FDA related issues, US pricing pressure, rising R&D spends and GST related issues, which in turn affected the earnings growth. However, in the last few months, these issues have started easing off. We have seen some positive developments in regulatory clearances. As per the recent comments made by the CEO of Teva Pharmaceuticals (a US generic drugs company), there is some relief in the pricing pressure for the generic drug manufacturers. This development is music to ears as most of the Indian pharma companies are into generic drugs manufacturing. We believe that there is a sustainable growth ahead for the sector. Indian Pharma companies which are focusing on building complex and specialty products pipeline would be able to sustain better profitability compared to one with simple generics products.

Some believe now that markets will rise only once earnings growth revives definitively. Do you share this point of view?

The earnings growth has been missing for a few years now. In the last 4 years, the Sensex EPS has grown at a meager CAGR of ~1% as not all the cylinders of the economy fired at once despite the economic growth causing disappointment in the markets. So, there is a general sense of hunger for the high growth in earnings in the markets. This lower growth has resulted in the stretching of the valuations causing the correction in stock prices. And as I said, the key trigger for the markets to up move would be the growing earnings trajectory. The demand outlook looks positive for the calendar year and low crude oil prices should be a good sign for the Indian companies and should help their bottom-line. So, it is possible that we can see a comeback in terms of earnings growth, which can help the markets through an up move.

Lastly, what sectors are you bullish on for 2019 & why?

FMCG & Consumer Durables: We continue to like consumption theme be it rural or urban consumption, discretionary spends, etc. FMCG and consumer durable manufacturers would be beneficiaries of the rising spending power in rural areas along with improving electricity infrastructure in villages. Investments in infrastructure, election spends and higher MSPs will result in more capital in the pockets of rural population which will benefit the FMCG market. Availability of easy no-cost EMI has also increased the spending. Retail segment also seems attractive given the above-mentioned tailwinds.

We continue to like IT. The recent improvement in the US economy and rising spends from US Inc. along with a rising share of digital revenues are favorable for the Indian IT companies. We like the companies which are working on increasing share of digital revenues in their portfolio and investment across technologies such as IoT, Cloud, Artificial Intelligence and Machine learning, though macro-economic concerns might have industry wise impact slightly.

And Pharma, as I said earlier, with the issues in the sector easing off and the Indian companies working on complex molecules, we see a brighter future for the sector.

Private Banks with retail and corporate focus: The trend of private sector banks gaining business at the cost of PSU banks still prevails. Private Banks are reaping the benefits of the financialization and formalization of the economy and would continue to increase their share in the loan growth. Select NBFCs with properly managed ALM profile would continue to gain market share along with a few retail focused and corporate banks. Reduction in provisioning helped few corporate banks report better profitability and these corporate banks with an extensive network, high CASA and low NPAs can be looked at from 3-5 years point of view given that the NCLT- IBC framework is working on resolving the NPA issues.

Textile and Chemicals: As global economies are doing well, these export-related segments like textiles and chemicals also has ample scope for growth. India holds the advantage in these two sectors on account of India being the largest cotton producer (thus secured on the raw material front) for textiles and better production practices in chemicals industry where the West is looking for shifting production to East and India is considered as better option vis-à-vis China. In both Industries, India scores better due to lower labour cost, talented, educated workforce and stringent Intellectual Property laws. If serious sanctions are imposed on China going forward, India would be benefitting from the reduced cost competitiveness of Chinese goods in the US.

Cement and Real Estate: We have changed our stance from underweight to neutral on these two sectors. In the last calendar year, we saw an increase in the real estate sales (the number of units sold was more than the projects launched). Regulations like RERA led to better execution and non-serious players moving out. Larger players with light balance sheet benefitted from this. We expect this trend to continue and we can see some revival in the real estate sector which in turn will also benefit the cement industry.