It is too early to predict a slowdown in terms of earnings growth for equities
Nilesh Shah, President of Kotak AMC says it is too early to predict a slowdown in terms of earnings growth. He gives his view on earnings growth, the markets and even advises what would be a better option for investment.
An interview with Nilesh.........
Q: Have things now clearly tipped in favor of a slowdown in the Indian markets and would you revise any estimates that you had maybe a month ago?
A: I think it is too early to have any kind of downward revision. I guess by and large, the street does expect the GDP to sustain a growth rate in the excess of 8% and on the back of that, with inflation at about 5-6%, corporate earnings are expected to sustain a growth rate of about 18-20%.
So from that perspective, I think corporate India seems to be on course to achieve 18-20% growth and lot of this growth is going to be contributed by the technology and telecom sector and of course the banking, financials and the insurance sector. The three put together constituted about 40-50% of our Indices.
So I think from that perspective, it is too early to project any kind of slowdown in terms of the earnings growth.
So from that perspective, I think corporate India seems to be on course to achieve 18-20% growth and lot of this growth is going to be contributed by the technology and telecom sector and of course the banking, financials and the insurance sector. The three put together constituted about 40-50% of our Indices.
So I think from that perspective, it is too early to project any kind of slowdown in terms of the earnings growth.
Q: Agreed that growth is on track, so what are you looking at 2,000 point down from the top? Are we looking at mouth watering valuations, will you advise people to buy or would you say don’t catch a falling knife and wait a bit?
A: If one looks at the marketplace, then stock prices essentially are a function of the earnings and the P/E multiples. The earnings growth, as we all know, is broadly on track and so it is a situation of P/E multiples, which had expanded close to 19-20 times FY08 earnings have to some extent contracted to about 15-16 times, which broadly is in line with our long-term averages.
We have to keep in mind that today we are talking in context of some kind of global jitters, to which we also might have some amount of collateral damage, which could lead to marginal contraction P/E multiples on a temporary basis.
We have to keep in mind that today we are talking in context of some kind of global jitters, to which we also might have some amount of collateral damage, which could lead to marginal contraction P/E multiples on a temporary basis.
Q: Mr. Narayan Ramchandran was saying that double-digit growth is great, but even low double-digit growth is something one has got to learn to live with. The concern here perhaps is that today fixed deposit possibly gives you 10% fairly risk free, so do you see money moving away from equity into debt or atleast money that into the side line not coming back into the markets?
A: After a very long time, fixed income markets- whether it’s in the form of debt or deposits, essentially they are into one-year fixed income products that have started giving you close to about 10% returns and that surely can be very tempting because we are seeing the situation after three-four-five years.
So I think it can be very tempting in the short-term, but we need to keep in mind that these returns essentially are on a pre-tax basis; on a post-tax basis, investors do end-up earning anywhere between 7-8%.
In the backdrop of that, equities have been delivering returns anywhere in excess of 25%. And even if that contracts down to as low as 15-20%, we have to keep in mind that from more than one year perspective, those returns are tax free.
So, I think on post tax basis, equities over longer periods of time can give significantly higher returns and that’s something which investors need to keep in mind in their financial planning.
So I think it can be very tempting in the short-term, but we need to keep in mind that these returns essentially are on a pre-tax basis; on a post-tax basis, investors do end-up earning anywhere between 7-8%.
In the backdrop of that, equities have been delivering returns anywhere in excess of 25%. And even if that contracts down to as low as 15-20%, we have to keep in mind that from more than one year perspective, those returns are tax free.
So, I think on post tax basis, equities over longer periods of time can give significantly higher returns and that’s something which investors need to keep in mind in their financial planning.
Q: Has the Budget changed your outlook on any sectors, cement, IT for instance?
A: Since the Budget is all about the fiscal policy, it definitely has an impact on some of the sectors. The most obvious one has been the cement sector, where having the variable or the differential excise duty depending upon the final retail selling price of cement. I think that sector is going to have problem, the problem may not be so much in terms of the ability to raise prices or maybe significant changed in earnings, but its probably that if the industry does not reduce rates, it could further face subsequent actions from the government. So from a sentiment perspective also that sector continuous to look weak.
From a positive perspective, there aren’t too many sectors, which stand to gain tremendously from the Budget. But areas like telecom, technology, media are sectors that have remained relatively, insulated not only from the Budget, but from essentially any kind of a global slowdown or any of these concerns of interest rates or inflation.
From a positive perspective, there aren’t too many sectors, which stand to gain tremendously from the Budget. But areas like telecom, technology, media are sectors that have remained relatively, insulated not only from the Budget, but from essentially any kind of a global slowdown or any of these concerns of interest rates or inflation.
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