Stock Market

Much-delayed earnings revival driving share rally: Experts

Indian shares have undertaken a remarkable rally recently, with the Nifty making a 100-point jump for two straight days.

On the day the Narendra Modi government completed two years in office, the Nifty scaled the 8,000 mark for the first time in about six months.

Analysts said this was thanks to a number of factors, including a visible and much-delayed revival in earnings, increasing prospects of an above-average monsoon, as well as global cues supporting risk assets.

In an interview with CNBC-TV18’s Surabhi Upadhyay, Birla Sun Life AMC CEO A Balasubramanian, Sajiv Dhawan of JV Capital Services and investment evangelist Prakash Diwan, discussed their outlook on the market, saying that near term momentum looks strong, even as some concerns on valuations could appear going forward.

Edited excerpts from the interview on CNBC-TV18.

Q: It is people like you and your fraternity that have propped up this market in the month of May. You were missing in March, you were missing in April, but domestic institutions are back, 8,000 is here. What next?

Balasubramanian: As a money manager, we look at how the market is evolving on the basis of various initiatives that is being taken by the government and companies. We also look at what is happening globally.

But if you look at domestic institutions, especially mutual funds, the best years for the industry came in the last two years.

I measure this on the basis of flows: close to Rs 103,000 crore have come in, which is nothing but a reflection of optimism and expectation from the Indian economy.

This coincides with the last two years of the government during which various initiatives and reforms have been undertaken. Reforms can be silent — some have a long-lasting impact but they do not reflect in the market on a day-to-day basis. 

The way we see, the control on inflation [that has taken place] and the way oil and commodity prices have fallen, they benefit the economy. Finally, keeping a focus on growth as well on the fiscal deficit, I think, is one of the key parameters to measure the success of the government.

All these measure revolve around something they are doing that creates a ground for long-term benefit.

Q: When you are talking about long term you are optimistic on the market earlier in May itself and you were predicting 8,000-8,300 we are already at that level now. How much more can the current rally how much further can it take us?

Balasubramanian: Though I don’t normally look at charts, today I saw the market is near the 200 day moving average, I think, for the first time in months. 

Also, given the monsoon predictions, and the Fed rate hike — which is an event all of us are looking for — it is something people are now beginning to accept…

Q: So you don’t think that is going to be a deterrent even if we do get maybe not a hike, if we get certain very hawkish statements in June you think this rally can weather even that?

A: It can because for the first time, the market players believe that let the rate hike come, instead of having this uncertainty linger. 

Another event I think all of us are looking at — even global players — is Brexit. Increasingly now I think the confidence is that the way the negotiations are being done, there is a high probability that UK may stay within Europe. What happens is once the number of uncertainties get removed, automatically people would start looking at fundamentals.

Q: 8000 is here, this is an expiry that the bulls are going to remember very nicely for long time to come. Just looking at the trading internals of the market right now, how much further do you think this momentum can take us?

Dhawan: If the momentum continues and the global cues support then may be another 100-200 points on the Nifty before there is some concerns again on valuations and the ground reality. It has been a very smart move over the last couple of days, the trend is clearly on the upside. You should be long on the Nifty from around 7900 levels. Short sellers have clearly got squeezed. Most people did not expect the Nifty to cross 7950. 8000 has happened so easily today as you have seen. There could be some follow up buying tomorrow, there will be some exuberance, some positive sentiment as you have been hearing already. There will be talk of the markets moving up higher. Obviously the US Fed rate news, once that gets over with that will be a positive for the markets. The European situation with Britain is also a slight cause for concern.

We have seen in the markets where the results are good, stocks like Larsen, the markets are rewarding those stocks quite handsomely. So, the strategy remains the same, you buy the good quality stocks on dips and you have clearly seen that this market is rewarding the stronger and more fundamental stocks which keep moving higher and higher. They are not so cheap but that is where the FIIs and institutions seem to be putting their money. You have seen that across the board with banking and certain stocks and sectors where despite the higher valuations these stocks are still likely to move higher over the next few weeks.

Q: Was this an L&T rally, was this just momentum playing out because you have had strong global markets as well, not today, today we were outperforming but the last 2-3 sessions have actually been pretty decent globally as well. How are you looking at what has happened today?

Diwan: L&T was the poster boy of the day for this 8000 touchdown. Interestingly it also represents all that the government has been focusing on all these months and these last two years if I were to kind of stretch it.

You look at what does L&T represent – infrastructure when it comes to road, construction of ports, smart cities, railways, defence and L&T is part of all of that. So, when a stock like that starts seeing convergence of positive views from FIIs and the DIIs and they start putting money, two days in a row is good enough. That is exactly what has happened today.

While L&T would probably be symbolic in terms of that upshot that it has given to the market, what is interesting is that the turnaround seems to have moved from consumption to also capital goods which is in my understanding the most well-defined proxy to the economy’s revival.

If that starts happening you will have a slew of other sectors which will participate in that. So, may be except for a few sectors which probably get sidelined, I think the participation is going to be all round. That is exactly why everybody is very happy, it is not just the 8000 mark but the way the 8000 mark has been approached, there has been enough consolidation, enough selling off, enough profit booking that has happened.

Q: We have taken almost near 6 months to get back to this level.

Diwan: Yes. So, it is not something which is like a flash in the pan. I would believe the rally has legs, it is definitely the beginning. Of course you will have corrections, you would have volatility, you can’t take that away. It is not a secular trend that comes through but it definitely seems to be in a very strong grip for the bulls at this point.

Q: What are your thoughts when it comes to earnings? Let us take a look at how cement companies have delivered this time around, let us take a look at Tata Steel and their India operations and the way their performance is now looking much better. Is that earnings disappointment completely behind us. If it is given that this has been a slightly stronger than expected season is there more that is left to be priced in?

Balasubramanian: We were doing some analysis. This quarter’s numbers is one are the best that have come in the last 12 quarters. It is an indication that whatever has been happening in the last 1-2 years by various companies, whether it is with respect to keeping cost under control, our focus on volumes and now increased level of productivity and so on and so forth is reflecting.

Another interesting aspect that we are seeing is: out of top 100 companies about 50 companies have reported good numbers and about 50 companies have not reported so good numbers.

It also means that we can’t just come to a conclusion that everything is coming back just because market has gone to 8000. The fact of the matter is, as you asked about cement, where is the demand coming from?

Q: Roads are getting a lot of positive commentary from EPC players from guys who are building roads in the country?

A: Correct. A lot of the state governments especially in the last one and a half to two years are also building up their own activities and the whole government change which the NDA brought in — in terms of federal structure by giving more funds to the states — is increasing the spending at the state levels.

If you look at the some of the southern parts of the country where the numbers are pretty good in terms of dispatch, it’s real. If you look at pockets of the country there, we have been seeing an improvement.

The other big change that could come for the country as a whole is actually the way the competition is being now brought in among various states in order to actually have lot of development activities being carried out. That seems to be actually now beginning to play out in terms of reflecting on some of the numbers.