{LONGTERMINVESTORS} India Strategy - Q3 FY16 Preview: Another disappointing quarter...

 

Q3 FY16 Preview: Another disappointing quarter

 

Q3 FY16 result preview

Q3 FY16 is expected to be another disappointing quarter for corporate India and raises concerns regarding a much delayed economic recovery. The net profit for our coverage universe (ex energy & financials) is likely to fall by 2.3% yoy (rise 3% qoq).

 

Market outlook for 2016

Rising concerns over a global slowdown, particularly due to a possible hard landing in China, heightened geo-political tensions and lack of visible recovery in India Inc earnings are the reasons for the ongoing fall in the stock market. A strengthening USD is resulting in flight of capital to safety and all emerging markets are getting painted with the same brush by FPIs. A major part of the year 2016 is in for a volatile period and may not see substantial absolute return on Nifty/Sensex, at least in the first half.

 

Global concerns will continue to plaque the market time and again. China has historically never stopped with just one or two rounds of currency devaluation and this time may not be any different. Any further devaluation on its part would result in currency wars among emerging markets to maintain their export market share. The US Fed may raise rates for the second time in April or May and markets are mostly likely to get jittery ahead of crucial Fed meets during the course of the year. We expect a gradual 50-75 basis points hike by the Fed over next 18-20 months.

 

Back home, lack of major action in parliament or on the ground level is a cause of worry. The Union Budget is unlikely to be path-breaking due to inadequate resources and pre-occupation with politics of tackling the opposition. Three key states go into elections, where the BJP is not a strong regional player and lacks a strong regional ally. An adverse result, similar to one seen in Bihar state elections, may be a sentiment dampener for the market. The slow economic recovery and poor show reported by Corporate India, quarter-after-quarter, will continue concern as well. Q3 FY16 is no different with estimated profit fall by 2.3% yoy for our coverage universe (ex energy & financials).

 

While it may be difficult to predict the timing of broad earnings pick up, but a recovery has started in many companies outside the Nifty. It would be prudent for investors to identify these stocks and sectors rather than wait for a full-fledged recovery. With valuations beginning to ease (P/E of 13x FY18 EPS for Nifty) on account of the ongoing market fall, investors would be best advised to gradually increase portfolio allocation to equities.

 

Among positives, India's GDP growth is the fastest in the world; even ahead of China this year. The country's demographic profile makes sustaining high growth rate easily possible. India is one of the few countries in the world with the inherent ability to bring interest rates down. That our inflation is down is not merely a consequence of falling global commodity prices but also due to disinflationary trends in domestic economy clearly evident from the CPI. Reducing current account deficit and fiscal deficit will have a resounding effect on the economy. If commodity prices remain subdued then it would continue to help an importing nation like India. And when the corporate earnings recovery does eventually gather momentum, it would witness a cagr of 20%+ for 3-4 years easily. GST, of course, would be an added boost to the market.

 

While the near to medium term outlook looks hazy, this period offers a fantastic chance to buy growth stocks from the broader market. It's not unthinkable for another ~5% fall in Nifty, but the best returns are invariably made when shares are bought in mayhem.

 

Top Picks for 2016

²  J Kumar Infraprojects

 

²  Capital First

 

²  Greaves Cotton

 

²  Coffee Day Enterprises

 

Please find attached a note on the same.

 

 

Warm Regards,

 

Amar Ambani

Head of Research

IIFL

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