Expectations from Q4 not high, should not affect market: Swati Kulkarni, UTI Asset Management

In a chat with ET Now, Swati Kulkarni, UTI Asset Management, says auto, FMCG and cement could benefit from rise in demand or at least sustained demand.

Edited excerpts:


Everyone is looking at Q4 earnings. It will give direction to the markets going forward. What is your own assessment? How do you think the Q4 is going to pan out for corporate India and of course for the market eventually?

As far as the Q4 earnings are concerned, post demonetisation, we had seen a surprisingly better quarter three (Q3) because either the inventory was consumed or there was a preponement of demand or there was inventory filling. So from that perspective we did not really see the impact of demonetisation. There is an apprehension that some part of it could be spill over in this quarter and you could therefore see a quarter which is far away from the festive demand or any kind of preponement of demand. So there is not much expectation in this earning season.

As expectations are low, if the results are not good that is not going to cause tremors in the market. Having said that, from a long term perspective we think that the macro is shaping up well and we have earnings drivers which could perhaps come from an operating leverage as the top lines start improving and there would be a financial leverage also which is expected to show off on the earnings growth of corporate India.

So on long-term drivers, we are pretty much sure that these will gain firmer ground as we move ahead but in the near term, there could still be bit of disappointment but since expectations are low, it should not disturb the market.

Where do you sense pockets of outperformance and underperformance when it comes to Q4 earnings? Where do you think we are going to see some meaningful recovery and what are the sectors that you think are going to lag behind when it comes to earnings?

I would not like to tag my expectations just for the Q4 earnings. I would rather see which are the businesses that are likely to sustain a steady growth. When you try to address that, there are sectors in discretionary demand which given the kind of inclusive growth that is expected to be seen. This is one space which would continue to see steady demand.

That means some of the auto names which run on consumer discretionary demand, should see a steady earnings growth. The FMCG sectors could also see demand coming back. Since the government spending is the only driver right now apart from the consumption that we see in the economy, the sectors which are likely to benefit out of that could also see a better earnings recovery.

Cement is one such sector . Affordable housing has been on the forefront as far as the government spending is concerned and there is infrastructure spending in roads and railways. We are positive on that sector as well and also some of the auto names, as I said. The whole thesis right now is the domestic cyclical recovery gaining momentum and those are the sectors where my portfolios are positioned.

What is your opinion on PSU banks? We have seen quite a rally coming in on that one but again there are NPA issues and the recent waiver of farm loans led by the UP and other state governments. All this will effect the overhangs for PSU banks.Do you think we may see profit booking going forward here?

As far as asset quality issues are concerned and the resolution is very important for the asset quality related problems to go off. The other side is of capitalising these banks and when that comes, since the government is also a large holder there, it bounces off to the government finances and their take on the capitalisation in the banks.

Right now we are not seeing that as so much of a problem because the credit growth has remained low but if the credit growth picks up, then there would be clear differentiation between the banks in the PSU sector which have capital adequacy and which could take on that credit growth. While on the liability side as far as the retail deposit franchises are concerned, some of these banks are really standing out versus the private sector but since there could be capital adequacy issue when you drill down to different banks, these are the things which one needs to really take into account.

As you said, farm waiver is something which is affecting the psyche of the borrower and that could also go a long way in terms of the sentiments that could get affected. These are the important issues that one needs to consider when they are looking at PSU banks as a long term investment opportunity.