‘There has been a big jump in equity volumes’

Corporate earnings are 30-35 per cent below their potential and it is the prospect of a real revival that is driving investor interest, says Amar Ambani, Head of Research at India Infoline. Excerpts from an interview:

Recent IPOs have received huge subscriptions. Do you see this as a sign of irrational exuberance?

The oversubscription of 40 times from retail investors in Snowman Logistics shows that a lot of them are waiting to get back into the market through the IPO route too. Markets move in cycles and irrational exuberance during bullish times and unwanted pessimism during bad times are something we have to live with.

While cyclicals from sectors such as power and capital goods have been re-rated in the last one year, their recent earnings haven’t been all that great. So, do you see a problem for these stocks to deliver gains from here?

No, I don’t see a problem there, as earnings will take time to recover. Many of these stocks have risen multiple times from their lows and, therefore, they are susceptible to a correction. Basically, stocks in the cyclical sectors are now looking for new earnings triggers — an improvement in order flows or revenues.

On the Sensex earnings, analysts have been projecting a double-digit growth for two years now and it has not come through. Are they being unrealistic and pricing in a recovery too soon?

You should note that the earlier earnings expectations were based mainly on a low-base effect. But now, the expectations are based on the actual economic recovery that people are seeing. You should also note that earnings for corporate India today are 30-35 per cent below normative long-term levels. On valuations, you cannot generalise across stocks or sectors.

Several low-quality stocks have run up too; for instance companies with debt problems. What’s your view on this?

That’s a function of high liquidity in the market; it always tempts people to put money in all kinds of stocks. For example, if you like IT as a sector, you can practically bet on any stock in the space. But if you like infrastructure, you cannot take this blanket approach. You will have to pick and choose the business pretty carefully. Governance is an issue for some players and so is leverage

There has been concern about FIIs running out of headroom in the top stocks. How are they getting around the problem?

Yes, this is one of the near-term concerns. But there are large sectors where there is still scope for FII flows. Oil and gas is one area where pricing reforms may drive FII interest. The IT sector too has considerable headroom. Then of course, there are quality mid-caps.

Equity mutual funds are seeing inflows after a long gap. As a broker, are you seeing a pick-up in retail trading interest in stocks too?

Yes. In fact, our broking income saw a significant jump in the latest June quarter. This is despite broking yields falling very sharply in the last two years; that is an indicator of the extent of revival in volumes. In terms of interest, we see older investors raising their margins and wanting to trade more. In wealth management, we have been doing quite well with assets under advice of ₹68,000 crore. We have been advising our wealth clients to increase their allocation to equity in recent months.

COMMENT NOW