Earnings may remain vulnerable over next two quarters: Prabhudas Lilladher MD

Dilip Bhat, Joint Managing Director, Prabhudas Lilladher Group talks to Business Line on how the markets are evolving with algo trading, a third stock exchange and the dominance of derivative trades.

What are your thoughts on MCX-SX getting clearance for a third stock exchange? How will it change the stock market?

It’s going to be interesting to see how volumes ramp up. They have an advantage in the sense they already have derivatives in the currency market. MCX-SX will now be able to deal in equity and equity futures & options, interest rate futures and wholesale debt segments. Investors will now have multiple options to invest across asset classes and that makes MCX-SX unique.

MCX-SX is already ahead of the curve in terms of distribution network and technology back-end, all that needs to be done is to grow volume and increase market share, given that they are already in the business of exchanges and financial software. One can now expect more products, more innovation and more opportunity for arbitrage and more liquidity.

With cash market volumes at a low and derivatives making up much of the market, revenues for brokers are under pressure. How is Prabhudas Lilladhar coping with this?

Well, as the mix is changing there is no doubt that the yields too are coming down. We see a similar trend happening for us though the rate of change is little slower for us. In the short run, there is pain but world over as we see the derivatives give great volumes and that more than anything compensates for low cash volumes. The name of the game is volume.

NSE data show that about 30 per cent of the market volumes today come from algo trades or co-located facilities. How is this impacting traditional brokerages?

Markets are undergoing continuous change, from predominantly delivery to derivatives and now within derivatives algo trades are gradually taking over. Well, even from us, some clients do demand such packages. Algo trading could well be the future of the markets. We understand as India opens up further for foreign investors they would go for algo trading in a big way. Either you learn and adapt quickly or risk being left out in the race.

Though market valuations today appear cheap, there is the trend of falling return on equity and slowing profits of companies. What is your take on this?

With Nifty EPS growth estimated at 13 per cent for FY13 and 12 per cent for FY14, it is currently trading at close to 12 times for FY13 and FY14 respectively. At PEG of close to 1, markets are not cheap. Falling ROEs and free cash generation coming down it only confirms this. It will remain a selective market.

On India Inc’s profit growth, is the worst behind us? Is the downgrade cycle over?

A low GDP growth would lead to weak corporate earnings growth. So, in that sense, the worst may not be over for India Inc. In my opinion, things will still continue to be bad for the economy and may even get worse. Hence, earnings will remain vulnerable to a series of downgrades over next couple of quarters.

Taking stock now, would you bet on consumer and pharma stocks which are at steep valuations or on beaten down infra and construction names?

It depends on what your call is on the markets. If you feel that markets have bottomed out then the strategy will be to play the beaten down stocks where there could be a huge delta. Since I do feel markets will still have to struggle, given the poor economic parameters, therefore one should still play select consumer and pharma stocks. In the infra and construction space, one can certainly buy a few stocks just to play the rallies. But on a secular basis it is very difficult to justify their values on a long term basis.

(This article was published on September 2, 2012)
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