Stocks

Asset Quality | Manishi Raychaudhuri: Asset quality concerns behind us; India’s outperformance likely to continue: Manishi Raychaudhuri

“If I combine China, Hong Kong, Korea and Taiwan, it is almost 70% of MSCI Asia ex-Japan. They have dragged down Asian valuations as a whole. This has been the primary support for the Indian market. Investors are forced to look at the only large market which has provided stability to returns and to corporate earnings,” says Manishi Raychaudhuri, Head of Equity Research – Asia Pacific, .

What is it that you are making of the India market construct right now? We have done so much better than what our global counterparts have done at a time when some of the major global economies are talking about recession. India has managed to withstand not just economically but even in terms of the market returns?
India has been an island not just in stock market terms but as you rightly point out, even in terms of economic growth. We think that this situation has aided the market and propelled its outperformance over the past one to one-and-a-half years. It is likely to continue for the foreseeable time horizon.

Indian outperformance has been catalysed partly by the huge concerns that we are seeing in north Asia, partly because of the recessionary concerns in the developed markets which are clearly bringing down the export-orientated sectors and they are the majority in this part of the world in north Asia and also because of some of the policy related concerns in China.

Since these are the large components of the Asian market, if I combine China, Hong Kong, Korea and Taiwan, it is almost 70% of MSCI Asia ex-Japan. They have dragged down Asian valuations as a whole. This has been the primary support for the Indian market. Investors are forced to look at the only large market which has provided stability to returns and to corporate earnings.

When we talk about corporate earnings, it has been mixed, banks have done well and some of the sectors have not done that well. Which sectors will lead the earnings?
In the near term, as far as this earning season is concerned, on a combined basis, some small downgrades to say MSCI India or Nifty consensus earnings estimates. Banks have done well, particularly the private sector banks and we believe that that pack would continue to do well because credit growth is now coming back. They would also possibly have net interest margin expansion, though less than their counterparts in developed Asia. However, the asset quality concerns are clearly behind us.

« Back to recommendation stories



On the other hand if one looks at consumer staples or consumer discretionary, there could be pressure on their margins because of the input cost increases and this is a bit paradoxical because industrial metals and soft commodity prices have declined but the Indian currency has depreciated about 10% to 12% and so inflation of imported inputs would possibly feed through to margin pressure over the next couple of quarters.

The other sector that could suffer in the near term would be IT because of the concerns in the US and the European region about the pressure on order inflows. But Indian IT services are not exactly in the same boat as the technology hardware manufacturers in north Asia because as far as the new order inflows are concerned, we have seen significant momentum as far as the front line IT companies go which has provided some degree of visibility in their revenues in the medium term.

What is your take on the pharma pack? Is there any stock or theme that you like in the pharma space?
I would not comment on stocks individually. We have a small exposure to the pharma sector as far as India allocation is concerned in our Asian model portfolio. We think that the main driver of the Indian pharma space is now the focus on the domestic market and this is a paradigm shift that has happened over the past few years.

Earlier, the majority of the frontline pharma companies were all focussing on the generic market in the US, they still do but I think the fulcrum of the focus has shifted to the domestic market and I think one concern is possibly valuations and that is something that the market would have to deal with. In general, when the cost of capital goes up, it is the highly valued expensive sectors that tend to suffer most. So pharmaceutical is one sector that has suffered on that count, consumer staples could be another one.

You track carefully, not asking you to comment on where the stock may be headed. I just wanted to know where could the next trigger come in from because they recently announced the demerger of the financial services that also has failed to enthuse the market?
We think that for large conglomerates with footprint in various different sectors, it is important to look at each of the individual businesses separately. If one looks at telecommunication, oil and petrochemicals, there are always some tailwinds for each of them or even their retailing business that some of these conglomerates are engaged in.

In the case of telecommunications, we are now seeing the effect of the virtual duopoly that the sector is in. In terms of ARPUs and margins, in case of petrochemicals or oil, even though the refining margins have contracted, they are still significantly higher than what we had over the past two or three years. These are some of the tailwinds these conglomerates can benefit from.


Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button