Looking at the headline numbers, earnings for the second quarter of the fiscal year 2019-2020 are expected to remain weak, said Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life AMC. Some company-specific downgrades are expected after Q2 results, he added.
"Probably not so much in this quarter but the next quarter where you will see the impact of some of these downgrades which are going to happen. Some relief coming in because of the tax cuts for a few companies," he said.
"There are a few companies in a few sectors where you would see downgrades. There are other sectors in the consumption space or the retail where the tax cut benefit would be much bigger. So headline earnings might get downgraded very marginally but company specifics you could see more disappointments,” he said.
Patil said further earnings downgrade is expected in the auto sector and some non-banking financial companies. "Even on the baking side, some of the corporate banks, there could be marginal downgrades over there because the outlook on credit has deteriorated in the last couple of months especially on the lending to the NBFC sector. Those are areas where one needs to be worried about,” he added.
“We might see another quarter of pain in the auto sector. This festive season is what people are hoping to see how the actual retail demand picks up because the base will start to look favourable. Last year in the month of October onwards we saw the slowdown in the auto sector, it is probably a time to start looking at some of the stocks. We have seen a meaningful correction, there is enough pessimism,” said Patil.
Performance of rural economy will be important for consumption he said. “How the rural economy does is important because now a lot of incremental sales are happening in the rural side especially for four-wheelers now. Looking at how the monsoon has been and the government stimulus to the rural economy – if that stimulates the rural growth, you could see improvement in demand in Q4 onwards,” he further added.
Speaking about money flowing into the systematic investment plans (SIPs), Patil further mentioned, “We are not seeing any major panic in investors at least on the long-term investors, the money moving into SIP is steady at around Rs 8,000 crore. Retail flows are steady. At any dip, we are seeing investors coming in and buying into the market.”
“There is a lot of fear in the market, that needs to be addressed. If we don’t do that, we will see some more defaults in the NBFCs side. That is where the intervention from the government is required to give some comfort to the market and address this stalemate kind of a situation which is there in the market place. There are enough efforts by the banks to go and lend but even the banks are not willing to extend credit to some of the names,” he said.“We are underweight on the IT sector. Though nothing negative on the IT space, overall growth in the IT sector will be fairly moderate. Expect around 9-10 percent kind of a topline growth at best,” Patil added.