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This article is more than 3 year old.

Falling rupee is positive for earnings growth in India, says Macquarie Capital Securities

Falling rupee is positive for earnings growth in India, says Macquarie Capital Securities
Falling rupee is positive for earnings growth in India and people should realise that this is not unique to India, said Sandeep Bhatia, head of equity - India, Macquarie Capital Securities.
The corporate sector is in a much better shape than it was even six to twelve months ago due to the rupee crisis, Bhatia said.
"Indian earnings are positively correlated to a falling rupee, so we have the IT sector and the Reliance which would be a beneficiary of falling rupee," he said. "We would have a lot of metal companies which are positively correlated to the Indian rupee earnings."
On market correction, Bhatia said that we are definitely down but definitely not out.
"It is not a routine correction and this correction can continue for a couple of months. Does that mean that the India story is over or we have a real concern? Absolutely not,” Bhatia added.
Edited Excerpts:
Do you also believe that we are down but not out it is just a routine correction in a bull market or are you a bit more concerned?
So, I will take your question in parts. Yes, we are down but definitely not out. Is this a routine correction? Obviously, it is not a routine correction.
What is happening here is dollar strength, US treasury yields hardening, the entire emerging market (EM) basket of currency is coming under pressure for multiple reasons. India being part of that same trend, so it is not a routine correction and this correction can continue for a couple of months.
Does that mean that the India story is over or we have a real concern? Absolutely not. I have seen in my 25 plus years of looking at investments that whenever there is these kinds of corrections given a passage of time or maybe twelve months or two years these are actually fantastic entry points.
The last such entry point was when the demonetisation had happened. Mid of December was the low for the market and then we saw two years of very strong returns. We are again getting an opportunity in this market, the market can correct. I wouldn't be surprised if it hits 10,800 on the Nifty.
But does that mean that all hell has broken loose? Absolutely not. I think you should be a buyer if the market corrects of more than 5 percent in the next couple of months.
The good thing which is happening is that the market is now rebalancing itself. This was a very narrow market and any market observer would have said that this is the biggest cause for concern that there are around five to seven names that are moving the indices.
I think this correction will lay the foundations of a much wider and broader stock participation when the market indices come back and the rally starts again.
So that is my long intro, but I think that is the summary of the points I want to make.
You gave us the lower bound of 10,800 what about the higher bound because now we have to factor in the higher cost of capital, haven’t we?
Yes, we have to factor in the higher cost of capital and we also have to look at earnings growth. On our estimates, Nifty earnings growth is around 17-17.5 percent, it could go up.
In fact, the banking sector has created a low base, so optically the earnings growth would actually be higher. But if you strip out some of these losses of the banks which have been in the base for last year then the earnings growth is probably will be in 17 percent range.
I would think the top end of the Index is maybe around 12,500, but it is not something that is going to hit right now. But clearly, this is a market which is going to be much wider in terms of stock participation and much stronger earnings growth.
For two years in multiple conversations with yourselves, the question that has been posed is where is the earnings rebound coming, when are the earnings rebound coming and it has come. So this is not the time to throw in towel and say that the market is done.
I was just going through one of your notes on Tata Motors that your research team put out where you talked about how the things have improved on the Jaguar Land Rover (JLR) front at least in the month of August. We have seen some good numbers come in from the UK and the US. You think the worst is over for some of these global players like Tata Motors or would you still be a bit circumspect?
For global players, the top-line growth is going to be muted. There could be some couple of months which will be good, a couple of months which may not be as good.
The domestic part of Tata Motors is looking much stronger than it has for the last couple of years and that is something that is powering the stock in terms of volume growth in earnings. But I think this is a place in the market where I would still continue to look at the likes of Maruti Suzuki which is a cleaner and more subtle play in terms of the domestic story.
So Tata Motors looks interesting and some of the news on the international front could get slightly better. I would have hoped that it was much better than it has been in the last couple of months. But I would still think that the domestic plays are where we should look at.
One tendency has been, of course, to move towards IT and pharma because of the way in which dollar has behaved. What would your pick of the pack be, stick with the large gaps or more go for the midcaps in both these spaces?
Our research coverage is more aligned to the large-caps and we are more comfortable talking about that and therefore, I would think large-caps have always been a strong performer in India with definite risk which is more manageable than the midcaps.
So, I would go with Tata Consultancy Services (TCS) in IT. We like Larsen & Toubro Infotech and that is something which we can also look at. But as a strategy, I think large-caps are where we should be. Especially in the correction large-caps will actually do much better.
If we see stability in interest rates, we see stability on 10-Year bond yields and a new government and post-election political stability will allow the midcaps to come back. But that is probably after April- May, next year.
Correct me if I am wrong, you guys had to upgrade the EPS estimates for the pharma sector on the whole because of the way the rupee has depreciated. Stocks like Sun Pharmaceutical have already given you 20 percent returns this year. You think there is more to go for many of these large-cap pharma names?
A: I think large-cap Pharma is going to be a mixed bag because there is a benefit of the US dollar versus rupee. But remember a lot of these large-caps are also selling into emerging markets where the crisis is centre stage, so there could be impact on the top line.
So, I think for pharma the picture is going to be specific to each stock. To look at the combined picture of what is happening in the markets in terms of their revenues, translation on currency and the balance sheet in terms of debt liabilities which maybe dollar nominated. So, it requires a much more detailed study rather than one sector-wide view.
In this context, I would prefer something like Cipla which is much better than some of the names where there could be a couple of moving parts both on the balance sheet and on the revenue side.
Let me come to the financials, because of this interest rate hike probably a crunch of margins in some of the NBFCs, would you be very selective? What would pass your test?
We have been very careful about NBFCs. They were trading at very high multiples. The banks are much better placed, we would go with the likes of ICICI Bank or even Axis Bank, and these are better plays vis-à-vis the NBFCs in the current scenarios.
I would wait for a correction and in fact, if the emerging market contagion actually continues through autumn I mean October and November, then I think some of these names will be at much lower levels.
You think this is a good buying opportunity in FMCG names like Godrej Consumers? I was going through your note on Godrej Consumers where you say that the growth in the household insecticides business has been muted. But you still maintain your outperform rating. So would you advise buying on the dip?
Godrej Consumers is a well-managed business. It is actually a portfolio businesses which has a high growth in emerging markets. There is a large part of Godrej Consumers business which is in Africa. There the currencies have not been under pressure, the only market in which Godrej Consumers is big where the currency has been under pressure is Indonesia, but the good thing about the balance sheet is that it doesn't have foreign currency liabilities.
Most of its businesses are generating revenue in local currencies, operating costs on local currencies and it is not that there is a lot of debt on the balance sheet of these local entities which will need to be marked down or in some way create a burden on the balance sheet.
So on the whole I think any correction in Godrej Consumers is something which we have liked and will continue to outperform.
I think what people have to realise that this crisis is not unique to India, the corporate sector is in a much better shape than it was even six to twelve months ago.
In fact, Indian earnings are positively correlated to a falling rupee, so we have the IT sector, we have the Reliance which would be a beneficiary of falling rupee. We would have a lot of metal companies which are positively correlated to the Indian rupee earnings.
This is a crisis not of earnings, we had a long process in which there was really an earnings drought for the last four years. We are at the end of this process, in fact, a falling rupee is positive for earnings growth in India.
So we have to reiterate that valuations have been stretched in parts of the market and that valuation correction is a process which is going to happen. The rupee has been much stronger than what economist would have liked for the first three years from 2014-2017.
This is a very valid and required correction in the rupee rate, so finally we have cleaned up, we have cleaned up the NPA mess in this country. We have put GST in place.
We have the currency correction now happening. Clearly, the earnings growth is going to come back on a wider basis. So there is not an earnings crisis.  This is a currency which under pressure because of multiple reasons and which is in fact offering you a buying opportunity in this market.
I take a point entirely that there is usually a Nifty bump up a year after a currency depreciation. That pattern has been repeated. You all have increased the pharma valuations just let us know if you have increased any other valuation, any other earnings as well because of the rupee. For instance Reliance, metals or IT, any of them that has also been increased? And finally your word on Zee TV and Sun TV for that matter, the television channel stocks getting tough competition from over the top (OTT) and digital?
Again I will answer this in parts. We would like to revise the earnings after the first six months are done. So looking at quarterly sometimes misses the bigger picture, so the earnings revision are definitely going to happen in my view. But you will see them coming through in October-November.
In terms of Zee Entertainment and Sun TV Network, we like both those names. There is pressure coming through on the stocks right now but this is not structural to their businesses.
In fact, every consumer company that we talked to says that consumption is coming through strongly better than expected and to that extent advertising spending will also come through.
This movement towards OTT and so on is a long-term process which will take more than a decade and it will be only the one way in which entertainment is accessed at least in India given the multiple tiers of society and even within a single household there are multiple age groups that view screens and entertainment on multiple screens.
Therefore, it is not that one versus the other, but just the fact that multiple screens will get used. So to that extent I don't think Zee and Sun TV are structurally in any decline in their businesses and therefore, if these corrections continue this would be actually a very good buying opportunity.