Flat earnings may cap upside in market; economic turnaround holds the key: Raamdeo Agrawal

In an interview with ET Now, Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services, talks about the triggers that may help the NSE benchmark Nifty50 scale past 9,000 level. Excerpts:

ET Now: What do you make of the recent rally in the domestic market? Nifty was ruling at sub-8,000 levels, three-and-a-half weeks ago. But, bulls have managed to engineer a very strong comeback. Do you think that the market range has got shifted on the upside now?

Raamdeo Agrawal: The market has been flat for the last one year. I am surprised that it has not moved. So, we were wrong in predicting the market a year back and it looks as if we will be wrong today as well in whatever we predict.

But since corporate earnings are flat, it seems that the market is very unlikely to make any significant upmove. That said, the Indian economy is just about to turnaround, may be 6-8 months down the line. The market will be the first to know in advance that the economy is finally turning around. That will be reflected by the NSE benchmark, which may scale past 9,000 level. Now, when will the index hit that level, is something that I have no idea.

ET Now: What are you making of the market situation at present? Do you think that the market would be in this range for a while?

Raamdeo Agrawal: The current valuations - if you look at only in terms of PE multiples - look stretched. Corporate profits are quite depressed because of high interest rates and low economic growth rates. So if you look at the broader valuation ratios like market cap to GDP, we have a very reasonable valuation of less than 70 per cent. At the peak, just for the record, the number went to 1.8 times GDP. Clearly, the downside looks limited for a broader market and if an investor enters this market, a significant upside is likely on a five-year scale basis. Can it be three times? Yes, I think. . So clearly, we are at a very interesting juncture and we are very excited about what is going to happen in next six to eight months.

ET Now: How are you observing the current earnings season because we did not kick off to a great start? IT companies have disappointed. For Hindustan Unilever (HUL), margins were under intense pressure. The only surprise so far has been Reliance Industries.

Raamdeo Agrawal: Earnings for this quarter is not likely to be very exciting on an aggregate basis. But there will be a lot of fireworks on the positive side. There will be a lot of disappointments, particularly in the commodity space. A lot of companies will declare losses, which will be way beyond most of the analysts' expectations. So, we will have two spectrums - there will be companies, which will benefit from the losses of the commodity companies and there will be companies…. So those companies will show massive jump in the market operating margins. The total declared profit could be up by 50-70 per cent for few companies and there will be companies which might see 80-90 per cent correction in the profits. Maybe, a lot of companies will go from profits to losses.

ET Now: India has suffered in the last few weeks, largely due to big risk off environment globally. Do you see that easing?
Raamdeo Agrawal: It is very difficult to figure out. We really do not know right now…

See, in the short run, everything will be aligned. When the market falls, all the good stocks too will correct. But eventually we will realise that domestic stocks are different. In 20 years, Infosys has surged 6000 times, while the market is up only five times. Indian markets are up 100 times in last 30 years, but global markets are not up 100 times. Clearly, we have to acknowledge that India has had distinctly different story in the longer run. I believe that India will move far ahead of most of the markets in the world.

ET Now: What is your own assessment on the policy initiatives in India so far by the ruling establishment? Do you think that enough has been done by the government to convince global investors?

Raamdeo Agrawal: The government is working very hard in all the departments. The Prime Minister is working very hard. Earlier the expectations were running very high. The good thing is that expectations have kind of subsided now and there is no so-called Modi effect in the valuations. Everybody is now grounded. From here, things cannot go worse. So, the expectations can only go up. But it will take some time. Now, people want delivery on the ground and then the expectations will built. So maybe it is 6-8 months, whenever corporate earnings rebound and investment cycle finally picks up, we are going to see some spectacular show in the yearly performance.