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Pankaj Murarka: We are in for a reasonably good earnings season: Pankaj Murarka


“Recession in a disinflationary environment which is what we have seen over the last 15 years are very different than the one which we are going to see this time around where it will be a recession in inflationary environment,” says Pankaj Murarka, CIO, Renaissance Investment Managers.


Just wondering whether earnings can finally add some cheer to all this recessionary talk all around.
One point I really want to highlight is that the recession which probably US and some of the other western world are going to face during the course of this year is not necessarily bad because this recession is going to be very different than the recession that we have seen in the western world over the last 15 years post the global financial crisis.

Recession in a disinflationary environment which is what we have seen over the last 15 years are very different than the one which we are going to see this time around where it will be a recession in inflationary environment.

This will be a recession where US will still have earnings growth at aggregate level. Please remember that this economy drives a lot of flows and gives cues to global markets.

I feel that recession in developed markets is not so bad for developed markets themselves and in that context I think given that India still continues to grow and growth is resilient despite these headwinds we need not fear that and I think we are in for a reasonably good earning season going forward over the next month or so.

Let us look at the chink in the armour here. What is happening to the headline US tech stocks. Now we may endlessly argue and say okay those are product companies and we are services, the return ratios are different, the business is different; they are customer centric, we are company specific; they are B2C, we are B2B. I have given four instances why they are different, you can add another four. But historically when tech globally does poorly IT stocks do not do well, it is a very simple correlation which has been observed in last 15 years. Do you think that factor could be the impediment, now mathematically I cannot establish it but sentimentally it has turned out to be true?
I agree with you that it has a sentimental rub off effect. While tech has fallen in US and Nasdaq has corrected, Indian tech stocks have underperformed this year partially because of growth concerns.

I think if you look at Nasdaq, there is a significant dispersion in the performance of the index. Some of these very profitable companies and the leaders out there let us say Microsoft or Apple while they are down some 20-25% odd there is a large pool of companies which are loss making or not profit making companies which are down 60-70%. Having said that obviously the index has corrected by about 35% or so over the last one year. My sense is that when I look at some of these large cap companies like Microsoft, Apple, Google they are still growing high single digit 8-10% despite a recessionary fear in dollar terms.

While I am not an expert on US markets but looking at some of these companies and reading some reports and talking to few folks out there probably the Nasdaq index itself is around at trough because it is at about 25-26 times one year forward earnings and given the fact that the index level earnings are still growing at 10-12% in dollar terms, the index is not as expensive at this point of time as it was at the same time last year.

So probably few stocks here and there can still correct but the index level lows for this recessionary cycle in US for the US markets are already in place. I do not think US markets be it the S&P 500 or Nasdaq are going to make new lows. They might retest those lows but I think the lows for this cycle are already in place so I remain positively biased even on global equity markets.

What is your outlook when it comes to some of the manufacturing companies, do you think that the fact that we have seen a softening in raw material prices could aid margins for these companies down the line?
Absolutely, one thing which is clear and evident is that over the last 12 months or 15 months we have seen companies across the board taking very sharp price increases because all of a sudden these companies have experienced inflation which they had not experienced in their life.

Raw material costs have gone up by 20-30-50% and they had no choice but to pass that to their customers albeit gradually but they have done so. And as a consequence we have seen some rub off effect in demand in most of these companies and it is more evident in the consumer sectors where post Diwali while sales did pick up during the festival season and there was a momentum but companies across the board, consumer durables consumer companies and discretionary companies have been highlighting that things have slowed down.

I think probably from this quarter onwards we will start seeing some improvement in margins. It might take a few quarters before companies realise the full benefit of correction in raw material prices in their margins and I am sure many of these companies will again want to pass on some of these margin benefits to their customers to drive their sales. So yes I would expect some margin benefits coming across manufacturing companies be it consumer companies or let us say some of the commodity companies including metals and cement companies which had seen very sharp price hikes.

How much of the good news, good recovery, good margin expansion thesis is in the price for manufacturing companies because whether it is ABB or Siemens or whether it is a ACE or Alcon Engineering all these stocks are trading at levels which are above the historical averages?
There is no denying the fact that Indian markets are reasonably expensive and absolutely expensive in the global context. My only point here is they will continue to remain expensive because if you are one of the fastest growing economy in the world and you have a solid secular growth story then everyone across the world wants to own that and you cannot buy the highest growing market.

You cannot buy the highest quality market, the fastest growing market in the world cheap in the world of equities. So I think we have to reconcile to that. Coming specifically to some of these companies. Let us say ABB or Siemens are the companies which have delivered the highest earnings growth amongst the top 500 companies in India. This year ABB is going to do earnings growth of something like 50% when your index earnings are growing at 15% and that is because there is a significant momentum in their business.

Just two weeks back Siemens won a order of about Rs 28000 crore for Indian railways over the next 10 years now. Remember this is a company which does about Rs 10,000 crore of revenue. A single order is like at least 30% of the revenue and that too with the visibility over next 10 years and we are saying that all of these companies including let us say Indian railways are going to accelerate their capital expenditure.

There is a significant amount of investment and activity happening with new projects be it with clean energy across green or blue hydrogen or across railways.

This also means that these companies are going to witness significant margin expansion and their profitable growth will be significantly ahead of the revenue growth.

From a next 12 months perspective these stocks look very expensive but what market is trying to do in that sense is trying to price their medium term growth. In that context yes you are right that these stocks are expensive but my only point here is they will continue to remain so you do not have a choice with that.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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