‘Corporate earnings will recover from Q3’

Tanya Thomas &Suresh P. Iyengar
The Hindu BusinessLine
10 November 2015

The mutual fund industry has been bullish on corporate earnings despite the market falling sharply in the past few months. With the slowdown in China expected to persist for the next two years, outlook for the global economy appears to be gloomy. On the other hand, after waiting patiently for a few years, foreign-owned mutual funds are quitting India in droves and foreign portfolio investors are turning net sellers of Indian equity. A Balasubramanian, Chief Executive Officer, Birla Sun Life Asset Management Company, spoke to BusinessLine about future market trends.

How do you see the markets performing?
We believe it will be range-bound in the short term with an approach towards consolidation. We also feel the worst is over. We see a gradual uptick in the economy. It will largely be supported by evolving events, such as interest rates coming down, this reduction being passed on to customers and also pre-Budget preparations that will be the driver for the next year of growth.

Going ahead, the markets will surprise on the positive side. One, because of earnings improvement, and second, the government’s push with respect to spending over the last one-and-a-half years getting accelerated. The last piece is the whole mining auctions which happened last year. This will lead to higher mineral output. Everybody is saying output will rise but nobody has been able to link it to profits yet. The positive surprise will come in the IIP (index for industrial production) numbers.

When do you see corporate earnings reviving?
I think it would start from the December quarter. Lower rates on working capital will percolate into earnings, and this will show up from March quarter onwards. If you notice, post the policy rate reduction, banks announced a cut in interest rates but that is not enough.

Will banks delay rate cuts as they face pressure due to bad loans?
From banks’ point of view, it’s not right to look at just net interest margins. You also have to look at their NPA risk, the mandatory SLR (statutory liquidity ratio), and their priority sector lending requirements. Somebody has to pay the price for this.

One good thing that has happened is that with the dissemination of rates, the mutual fund industry has played an important role as they hold a large pool of funds in fixed income. If a corporate wants to issue a CP (commercial paper) for working capital, it will be 3 per cent lower than a bank loan. If that pie grows, we can see that benefit coming for companies.

Which sectors will be out of trouble first?
As a fund house, we believe in banking and financial services, automobiles, and pharmaceuticals; capital goods sector will see a revival. Also, IT will get the benefit of global spending coming in, especially in the US. Even for FMCG, urban consumption is on the rise. Rural is flat, but that will be confirmed with the harvest in January.

What do you make of primary market valuations?
The market is a great leveller. In the last few years, the market has been punishing over-valued companies both pre- and post-IPO. But valuation in the primary market is very subjective. If somebody is willing to pay for the concept, valuation can be costly. Someone else might be willing to pay only if there are earnings and not just for the concept. Others might say valuation is 20 times EBITDA multiple; so it’s not an apple-to-apple comparison. Ultimately, the concept should be long-term in nature and the potential of earnings growth should be high.

Why do you think foreign fund houses are quitting India in droves?
I think it is about scale; those who are able to scale up are successful. Especially with newcomers, they need to have patience. This is a long-term business. Also, with foreign fund houses, how their investment in India fits into their global strategy also matters. It depends on how much they are willing to invest in India overall.