Prasanth Prabhakaran, Senior President & CEO of YES Securities (India), with vast experience in the banking and financial services space, says consistent decline in earnings that has unnerved investors till a few quarters ago, has finally come to an end. Excerpts:

Both the BSE Sensex and the Nifty 50 are ruling near all-time high levels. How do you see the markets going forward?

In my opinion, rather than looking at the headline indices which do seem to be trending upwards and seem to be a little stretched, looking at the valuation side, it would be more prudent to look at stocks instead. And even at current market levels, there are plenty of stocks that offersuperior value in terms of their valuations. As such, the markets are on an upward trajectory supported by an improvement in the country’s fundamentals. This is clearly reflecting in the earnings growth too that has improved from the levels seen three to four quarters ago.

Although recovery is yet to be broad-based, earnings are on the path of improvement too. Fundamentals are expected to improve on the back of improving macroeconomic factors with recovery led by consumption, followed by public sector capex and external demand improvement; benefits of reforms percolating to the ground level and conducive inflation/interest rates environment.

Is the ongoing rally sustainable? What could derail this optimism?

I believe India is in a secular uptrend. This uptrend should continue in the long term as India’s fundamentals and macros continue to improve. This is visible in most high frequency indicators such as manufacturing and service PME readings, IIP, etc. As the benefits of the reforms announced trickle down to the ground-level, we should see an improvement in corporate fundamentals too. This, in turn, would further support the upward trend. As such, the only risks that we see to the markets are global geopolitical events. These could lead to knee-jerk reactions but given our market’s attractiveness on the global stage, they should recover relatively quickly post such reactions.

With the massive rally in the small- and mid-cap stocks, do you still see value in that space?

What we need to look at is that there are themes in the economy which would continue to support an upward rally in related sectors. These include consumption— led by an improvement in real urban wages and revival in rural consumption; agriculture-related sectors— given the focus of the government in enhancing both productivity as well as improvement in fundamentals and outlook which, in turn, support stock performance as well.

The current earnings (Q4 & FY17) season is almost over with most companies having declared their numbers. What is your reading on the performance of Indian Inc?

The performances so far have indicated that the consistent decline in earnings that has unnerved investors till a few quarters ago, has finally come to an end. Companies have been meeting and, in fact, evenexceeding earnings expectations in most sectors barring IT and Pharma which are facing sector-specific issues. As such, most companies have been focusing on improving operational performance through cost optimisation. Furthermore, balance sheet improvement has led to lower interest outflow as well as better execution strength in most cases. As the economy continues to improve, commentaries on future outlook are more optimistic as well.

Can you suggest some themes which are yet to be explored by investors?

I believe that there are two major themes that would play out. One is the rural theme. The measures that the government has announced so far should help in boosting agriculture productivity and consequently rural income. Therefore, stocks focussed on agri and/or rural consumption could be the next multi-baggers.

The affordable housing theme is the second one that I am positive about. The Centre’s focus on affordable housing would not only provide a boost to the real estate companies in the segment but also to the 70+ industries that are directly or indirectly dependent on affordable housing, such as housing finance, ceramic tiles, etc.

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