Which sector will have the best quarter? Vinod Karki answers

Before we talk about sectors, how important is this earnings season going to be broadly on margins and revenue growth front? Let us start our discussion with that.
So, earnings will be very important and more than the numbers, the commentary from the leadership about the near-term future will be more important because a lot of things have changed from the time of this quarter earnings. I mean the Q2 period – if you see now during the July to September period, things have changed a lot and people would be more inclined to see how the management are seeing things on the ground rather than the numbers. Because, just to give you an example, you know a number of commodity prices have reduced, while the demand in this festival season is looking quite robust. If you look at some of the high frequency indicators, the whole of Q2 might not reflect that entirety because input price changes take some time for companies to process. But the management commentary around demand and inflation are most keenly watched numbers.

High frequency indicators like GST, PMI, seem to suggest that demand in the festive season is robust while a number of commodity prices have fallen off so that will be a very key thing to look out for, for the manufacturers at least. Because, if you see at the end of Q1, the biggest worry for people was the margin because of the way the inflation was rising. There were concerns on the demand front too. But some of these fears are getting a little bit lower. Crude oil prices are cooling off. This will be important, besides just numbers. But if you just talk about numbers, I think banks, a large part of the Nifty weightage, will see good traction because with respect to mark-to-market, the bond yields have been flat or slightly lower.

I think for the quarter or so, the treasury losses that we saw in the previous quarter, will not be there. The business updates from a lot of these lenders seem to suggest that growth is quite good. So, I think both on growth and treasury losses, we saw plus margins because they have reprised their advances but the deposits take time. So, banks will do reasonably well in terms of earnings. While for the industrials, I think, the key thing to be watched will be the demand environment and how inflation pans out.

Let us talk about banks a little more in detail. PSU banks have been showing very good traction, at least three, four of them in the last four quarters in terms of good commentary, decline in asset quality, good loan growth. Do you see the PSU pack, the larger ones, to continue that momentum?
The key, especially for PSU banks, is how the NPA trajectory is moving and how growth is coming along. Everyone agrees on the point that we have formed a bottom on the NPA cycle, so the credit cost issues would not be there much.

While quarter-on-quarter, growth is looking robust for almost all banks, including PSUs, I do not think there will be any issue on credit cost while margins will also look good. Overall financials are well placed and the valuations are not extremely high as it is in some other pockets. If you see one thing in terms of stock performance that we have observed from the time Covid-19 hit us is that there has been a shift in the performance of capital intensive value stocks. Those cyclical types of stocks are outperforming even with such high volatility across the board. Despite high volatility in global capital markets, these types of stocks have outperformed. Earlier this was mainly done by growth and quality stocks. A shift has happened and the underpinnings of the shift are clearly the cyclical improvement in the capex cycle, credit cycle, and the pent up demand in discretionary consumption that we are observing now.

What about private banks, do you see the momentum on loan growth and will the asset quality improvement continue?
From a top-down macro perspective, what we are observing, it would not be like one – we are not talking about one company versus another, we are seeing a structural improvement in credit growth so for September, the fortnightly data is suggesting almost 16.7% non-food credit growth on a system-wide basis. I do not think anyone will be left out in terms of credit growth, especially when the investment cycle is picking up and the discretionary consumption across sectors is looking quite strong. I mean be it autos, retail, travel, the discretionary consumption is coming back. We are seeing green shoots of investment and that we have been talking about. Real estate, which forms a large part of the investment cycle, is a large chunk of the gross fixed capital formation. It is reviving after a decade. So no worries on the demand side, on credit growth and everyone will get its share. You just have to pick your own stocks.

So let me put it this way, which sector in your view will have the best quarter?

Clearly, it is banking. A lot of discretionary consumption is showing good traction. If you examine at all the high-frequency indicators, the demand for discretionary consumption is quite good and if they get any benefit of lower input cost on raw materials like oil, steel and other metals and other commodities, the outlook will start looking even better. They may not show up in this quarter, because the arrangement of raw material procurement takes time to reflect on the P&L. But clearly, the demand in the economy is coming from the investment-led stocks, the credit growth side of the economy and discretionary consumption. I think there is a weakness in commodities. I mean it is the other side. So when you say commodities are cooling off, it will be a problem.

So basically, stocks linked to the global economy and demand in the global economy might see weaknesses. Future growth of stocks linked to the global economy might see a little muted commentary from the management. The ones which are in the domestic economy, I think, will show quite a robust outlook. Domestic cyclical, capital intensive sectors, where we are seeing good traction, growth, investments supported by credit growth are the places to be at this juncture in the market.

Just one view on the way

, commentary came in, Q2 updates. In fact, 15 days ago even Mr Mehta of did say the full effects of inflation are yet to be passed on. When you mentioned a part of consumer is finding it difficult, was this the part you were referring to?

There are two parts to it. The consumption pattern is clearly demarcated into two parts – the staples and the marginal. I mean, from the perspective of the consumer, the marginal consumer is looking at broad-based, low price-point products. Income being not too robust, people in the informal segment might find a lot of hurdles in terms of spending. But, in the discretionary segment, where the formal side of the economy is involved and consumers are from the formal sector with good wage hikes, we are finding traction in terms of discretionary consumption. This little bit of dichotomy you see in consumption. If you look at the breakup, you will see realty, automobile and travel companies are expecting good growth. But we are seeing some struggle with respect to marginal consumers who are hit by inflation.