Results, G 20 Et Al

Sandip Sabharwal - Uncategorized - Results, G 20 Et Al

Nearly half of the results season is now through and in general results have turned out to be quite strong. Most of the Banks and NBFC’s have reported strong numbers and have been able to maintain asset quality as well as Net Interest Margins. The key going forward will be to look at margins in a period of increasing rates. The only negative has been on the credit growth and the outlook front where most banks are now talking about lower credit growth than earlier. Going forward, incase the credit growth picks up the margins will also come under pressure as the growth in deposits is very lackluster and given the tight liquidity in the system there is likely to be an upward pressure on deposit rates.

The few auto companies that have reported resulted have come out with good results and margins have been maintained or improved despite strong cost pressures. The operating leverage has come into play here. Half the companies here are yet to report, however given the robust volume growth the results should be good. Post the festival season the key aspects to be watched will be whether volume growth continues at the same pace. There could also be demand moderation due to increasing costs of Auto loans. Valuations on an overall basis continue to be comfortable for this sector and margins outlook also looks benign. However the key will be volume growth and the impact of increasing competition from new entrants.

Technology companies in general have surprised on the positive. I continue to be amazed with the business model of these companies where growth continues and margins are maintained on the face of various headwinds. The kind of volume growth that most of the companies have shown is quite positive. However valuations seem to be pricing in most positives at this point of time. Going forward in case the volume growth continues at a fast pace then we could see the sector still doing well. The headwinds for the sector in the near term will be increasing salary costs due to intense completion on hiring of new employees and the fact that the rupee has hardened significantly over the last six weeks. Most of the companies seem to be under hedged at this point of time and this can hit their margins for the next couple of quarters. The positive in the growth of this sector is that it has again started to generate significant incremental employment which is positive for consumption demand in India.

Infrastructure and Capital goods companies are yet to report in a big way, however the execution still needs to pick up in this sector and the overall pace of execution as well as order booking still does not seem to be outperforming expectorations and that is what drives stock prices.

Commodity sector companies have reported decent numbers in line with the rally in various commodities over the last six months. Going forward the key for most commodities will be the way the US Dollar moves. In case of an upward correction in the USD (which is my expectation) we could see a sharp sell off in commodities in the near term. Steel prices are also likely to see some correction in line with the fall in prices in the global markets.

Pharmaceutical companies have reported strong numbers and the M&A activity surrounding this sector has also led to the overall sector being rerated upwards. Overall the business model of a number of companies in this sector continues to be robust. However valuations have also run up in line with the news flow. Overall the sector should hold up well incase of any market correction.

FMCG companies have reported decent topline growth and have been hit by an increase in input costs. There is likely to be a squeeze in margins due to higher input costs and increasing competition. The valuations of most of the companies also looks stretched at this point of time.

Most of the Telecom companies are also yet to report. The key will be to see the margins picture in light of the intense tariff wars and also the impact of funding costs for the high cost 3G and Broadband auctions. Although valuations for the sector have come off and news flow on M&A activity continues to drives stocks prices up and down there does not seem to be much of excitement in the sector in the short run.

As expected cement companies have reported squeeze in margins due to lower prices and significant overcapacity in the sector. The overcapacity situation is likely to continue for at least the next one year. Unless there is some M&A activity there does not seem to be much value in the sector.

On the mid cap sides of the markets a number of companies have reported strong numbers and have seen a bump up in stock prices subsequently. In general given the increase in volumes and the operating leverage playing out the results are meeting or beating expectations. The last leg of the market up move has been led by huge FII inflows that have largely been on the large cap side. As such there still seems to be value left in mid caps.

The much hyped G 20 meeting went off without disappointing investors and talking about reducing competitive devaluations and setting norms on current account deficits. However the biggest currency devaluer i.e. the US is the one which is talking about not devaluing for competitive advantage. The printing press of the US Fed is creating most of the imbalances and volatility in various assets. With their promise to print another huge amount over the next one year it will be difficult for most emerging markets to stick to whatever is agreed at the G20 as most countries would not like currency and asset bubbles to build up to such an extent that it becomes difficult to control later.

Markets

The stock markets have continued to hold on in Emerging markets and rally in most of the developed markets over the last 4 weeks. The inflows into most emerging market assets have continued at a record pace and have set two records over the last three weeks. The flows that are coming now are resembling a sort of panic buying situation where people who have got left out want to participate at any cost. The promise of the US Fed to provide any amount of cheap USD funding is also feeding this phenomenon. I have been expecting a correction for the last few weeks, however given the intensity of flows it does not seem to be materializing at this point of time.

However I would still play on the side of caution as the markets have become susceptible to any short term reversal in flows. The correction as and when it unfolds should be sharp and fast as there does not seem to be any support from domestic liquidity for the markets as flows into Insurance companies are slow and Mutual Funds are facing significant redemptions. The month of November could be a challenging one for the markets. However any correction of 10-15% will create a strong base for the next leg of the up move as the froth in the markets gets removed.

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