Amid macro-economic challenges, Saion Mukherjee, Head of Equity Research at Nomura, is hopeful of economic growth and earnings recovery. He is positive on companies from sectors such as private retail banks, select NBFCs, automobiles (two-wheelers, tractors), gas, healthcare, rural-focussed ones, financing and construction. Excerpts:

What is your view on the corporate performance in the March quarter?

There were bright spots in Q4, excluding financials, wherein we have seen 24.8 per cent year-on-year growth in operating profit versus our expectation of 24 per cent. We have 72 stocks out of a total 112, which we classify as domestic-focussed companies, such as automobile, consumer, etc. These companies have recorded 30 per cent growth in operating profit in Q4. Of course, the March quarter had a benefit of low-base compared with the same quarter last year. Management commentary in general was strong.

What is the outlook for FY19?

The intensity of earnings cut has come down. From April till now, Nifty FY19 estimates are down 1-2 per cent, which is not bad. We had said earlier that corporate earnings are expected to revive and it was based on the fact that GDP was growing but earnings were not keeping up the pace. Earnings-to-GDP has come down to 3 per cent last year from 7 per cent since 2007. Historical trend shows that earnings start to pick up generally from such low levels. We expect 50 per cent earnings growth in FY18-FY20 led by financials’ low base. Excluding financials, it comes to 36-37 per cent earnings growth over two years.

Do you see any risk to your Nifty target?

Our Nifty target of 11,380 anyway implies only 5-7 per cent upside from the current levels. We are dealing with multiple macro-challenges such as liquidity, inflation and rate hikes across the globe. We don’t see a major correction. We are not saying that there will be a runaway kind of rally either.

What are your favourite and not-so-favourite sectors?

We are positive on financials, especially private retail banks and select NBFCs, consumer discretionary, especially automobiles, gas within oil & gas, and healthcare (contra call as they have been beaten down). We are underweight on consumer staples (very high valuation) and information technology (as growth outlook is actually not very exciting but stocks rallied).

What will happen to the Nifty if the BJP does not win the next elections?

There are reforms at the ground level such as Saubhagya, Jan Dhan Yojana and Swachh Bharat. Different governments have different policies. What is right and what is wrong is very difficult to say. Government has become more disciplined over the years. It is very unlikely that will change.

Obviously, there will be nervousness and sentimental impact if governments change. But I don’t see any radical change. There could be change in target price-to-earnings multiples but not earnings, as earnings are driven more by factors such as cost of capital and not led by politics.

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