Market momentum weak, H2 expected to be better: Dhananjay Sinha

Dhananjay Sinha, Co-Head Equities & Head of Research, Systematix Group, says the market which was largely driven by flows especially the retail flows have started to align with the market fundamental which is earnings growth.

Also, what is adding to the multiple contraction are the global factors which are feeding into valuations like the US bond yields are going up.

Apart from the valuation issues, there are uncertainty issues as well.

People had expected that the re-election of Donald Trump would be positive for India.

It has not been translated into FII flows.

All through October we were hoping for a bit of a turnaround and thought 24,000 will be the bottom.

Yes, the earning season has been weak but is it that weak that we have given up almost 3,000 points from the highs?Dhananjay Sinha: Yes, the Nifty market cap from the peak has fallen by roughly about 44 lakh crores and that is almost 8% and as percentage GDP it will be about 10 odd percent.

So, there is a considerable decline, erosion in valuation and it is happening with the earnings trajectory slowing down.

Till now, in all the listed companies, there is a contraction of about 13 odd percent.

Last quarter also there was about 2% to 3% contraction.

So, the second quarter is consolidating the view that the earnings trajectory is far from optimistic.

What is happening in the current season is that across-the-board, especially in the cyclical sector, there is a massive cutback in earnings.

Look at steel and cement, there is a margin pressure across the board and the same is the case in the consumer goods industry as well.

So, by and large, the market which was largely driven by flows especially the retail flows have started to align with the market fundamental which is earnings growth.

What is also adding to the multiple contraction are the global factors feeding into valuations, let us say the risk free rate US yields have gone up to 4.

34-4.

35% from a low of 3.

80%.

That is also compressing valuations.

Apart from that, there are uncertainty issues as well.

These things are weighing on the market.

People had expected that the re-election of Donald Trump would be positive for India.

It has not been translated into FII flows.

I would say going forward people would look for a better second half, a lot of companies are relying on better rural demand and better margins, etc.

At this time the momentum seems to be fairly weak and there does not seem to be much support coming from flows even from the retail investors in India as you were saying just now.

You would not recommend buying the decline just yet or do you think there is some sort of sanity and the valuation froth has cooled off enough in certain pockets or segments of the market and one can buy right now?Dhananjay Sinha: A lot of the headwinds that we were expecting have just about started.

We are not in a scenario where the earnings trajectory will start to bottom out.

What we will need to really look at is a scenario where there is a significant correction in the commodity prices, say 20-30%.

Typically that happens when the capitulation happens and where the margin starts to bottom out.

So, we will need to wait for that.

I would say that some of the stories with respect to rural revival, etc, can start showing up in the second half because of a better monsoon.

But the next cycle in terms of earnings will arise only after a significant correction in commodity prices.

A lot of these things are yet to happen.

The other issue is what has happened in the lending sector.

We are seeing some signs of rising NPAs in the micro finance and NBFC sector.

There is certain curtailment in lending growth.

So, we need to wait and be conservative.

We will look for sectors that are less vulnerable to this cycle.

Would the defensives like IT, pharma and consumption be better placed?Dhananjay Sinha: We are hoping so.

In the overall correction, everything starts to correct, but some tailwinds would start to emerge.

Pharma has been doing well, and has recently started to correct.

But pharma is one place that can be looked at.

Even IT.

We like the space especially because we think the tailwinds for them from a medium term standpoint or two to three-year standpoint might pan out and hence the correction in this space might be looked at as an opportunity.

The defensive space also includes staple companies wherein we are seeing that companies are finding it difficult to sort of show significant volume growth trajectory and there is a sort of tapering in the volume even for the premium segment.

So, I would say there are certain misses that consumer companies are showing, but these are relatively better compared to deep cyclicals like cement or steel where the contraction in EBITDA is over 50% for many companies.

So, at some point of time, as the consumer companies start to see better valuation, people might start to dip into the correction over there.

Those are the places where people can start looking at valuations, but at this juncture, the market seems to be very volatile and the momentum is very difficult to turn.

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