First up, give us a sense of how quarter three has shaped up overall. What are you making of the numbers that we have seen over the quarter because the street was pencilling in this to be a very negative quarter and it has not been all that bad, has it?
Harsha Upadhyaya: As far as Q3 is concerned, most of the results are already out. And if you look at Nifty basket, the results have not been anything great. In fact, slightly lower than what most analysts were predicting for the quarter.
There was an expectation that third quarter will be slightly better than first half. In the first half, if you remember, Nifty has shown a growth of about 3.5% on a year-on-year basis.
The expectation was there will be slightly better earnings in the second half. However, if you look at the third quarter numbers, clearly the numbers have been as muted as first half and are around 4.3% as of now on a year-on-year basis. So, essentially, third quarter, at least for the largecaps, has not been anything different than first two quarters.
And when you look at mid and smallcaps, again if you leave off some of the outliers which have performed reasonably strong, the rest of the basket continues to disappoint and that is where the overall earning scenario is not looking as good as what the expectations were at the beginning of the year or even at the beginning of the quarter.
So, seems like some more challenging time for the markets.
So, I believe that some more challenging time for the markets may be in. But everybody now just wants to know that when this selling pressure stop. When you are also not holding a positive view in the markets but give us a sense that how much correction could be in for the benchmark indices and especially for the broader end of the market because the pain is much more there.
Harsha Upadhyaya: Clearly from a very short-term perspective, most of the indices are at an oversold territory. So, one can expect some pullback in the next few trading sessions possibly. But whether that sustains or not is something that is debatable at this point of time as the outlook for earnings for the next quarter is unlikely to change significantly from the current scenario that we have seen. So, to that extent, wherever there is overvaluation, you will continue to see a nervousness and clearly the broader end of the market is still quite expensive compared to largecaps or compared to even their own historical average valuations. So, to that extent, it is going to be more volatile at the broader end of the market for some more period. However, if you look at Nifty valuations now, they are more or less at around average valuations.
So, to that extent, if you are a three-five-year equity investor and if you are not really perturbed with the interim volatility if it happens to be, then clearly the valuation risk or the risk of losing capital from here is very limited.
However, it is difficult to say the same thing for mid and smallcaps even after the recent correction as earnings have clearly been much lower than what the analysts were pencilling in and also much lower than the past trend rate which seems to have kind of got discounted in the market over the last four, four-and-a-half years and that is where compared to expectations there is a serious deviation and that is what market is reacting to.
Also, give us a sense that now what factors will matter the most for the markets? The reason I am asking is, since the start of this year, it has been an event-heavy time because we had the budget, we had the earning season which is now almost done, and then we had Donald Trump and PM Modi also meeting. But now we are done with these major events, what will actually decide the market movement in the times ahead? Will it just be the FII number that we should be looking out every day or some announcements on the Donald Trump tariff sanction but believe that this is going to be a daily activity for us now?
Harsha Upadhyaya: At least for next four to six weeks, it seems like there are no big events lined up, so to that extent liquidity and sentiments would probably drive the markets. As far as earnings are concerned, you will start looking at earning season post end of March quarter, so that is still another six weeks away.
Apart from the liquidity issues, clearly people will also be focusing on the currency levels, the volatility that could be there in the currency and also one should keep an eye on crude, that is where some of the positives can emerge. If crude moves towards $70 per barrel or even lower, I think not only it will stabilise our currency to some extent, it is also going to be positive for most of the corporate margins with a lag, so that is something that we need to see whether it happens or not.
Also, talk to us about what you are seeing panning out in the overall economy, especially when it comes to the consumption front because A) you have the budget that has given a major boost to consumption, albeit we may not see that effect trickling in just yet, it may still be a few months away, give us a sense on first, when you see this effect kicking in and secondly, our inflation numbers this time, you had WPI come in today, CPI day before yesterday, both of them looking quite healthy, rather CPI has come in much below what the street was expecting, so that is also looking good. Do you think all of this makes a case for consumption to start kicking back and maybe a relook or a revisit at that sector once again?
Harsha Upadhyaya: Clearly, lower food inflation especially is going to be positive for rural consumption. While most people look at food inflation and possibly think that when inflation is high, the rural population is going to do well because general tendency is to equate entire rural population to every producing population.
However, the reality is most of the people who work in farms are not the owners, they are not the producers, they are just working for a living.
And for them, high food inflation means actually the consumption remains to be challenging and that is what we have seen for the last several quarters.
So, moderating food inflation will definitely enable some of this segment to actually go and consume more non-food items and that is what is likely to happen over the next couple of quarters.
And for that to happen, we need to see the next year’s monsoon as well. Hopefully, as of now, it seems like it is going to be a normal one and as long as it is a normal one, the consumption trends should gradually improve from here on, at least for the rural side of the market.
As far as tax cuts are concerned, clearly there is a boost to the taxpayers who happen to be more in urban areas or semi-urban areas, so to that extent whatever benefits that you will see, which also will be from the next financial year for that matter, will be seen more in urban discretionary consumption.
So, the discretionary consumption at a lower end, whether it is small ticket consumer appliances, some discretionary consumption like travel, leisure, etc, will continue to see uptick and it is not that there has been a big break in that consumption trend.
As of now also, compared to rural segment, this segment seems to be reasonably okay. So, yes, a couple of quarters down the line you could see some positive impact of moderating food inflation as well as lower taxes.
But apart from consumption, so given the market correction, any other sector that you believe is still holding good or rather where the valuations have now become cheaper and it is a good opportunity to deploy fresh money?
Harsha Upadhyaya: There are several stock-specific opportunities that you will see given the fact that the markets are down anyway between 15% to 20% at the broader end of the market and some stocks have fallen even more than that.
So, as long as you see steady earnings and also less of disappointments over the next couple of quarters, that is the sort of names that you need to bet on if there is a valuation comfort.
If you have to look at it sectorally, nothing much has changed. It is only large banks which offer that kind of a valuation comfort.
However, there are still certain short-term headwinds. So, to that extent, investors who get into banks may still have to wait for some time before they actually see outperformance from the segment. However, from a valuation perspective, there is quite a bit of comfort on large banks.
