'Market sentiment still shaken'

Raamdeo Agarwal of Motilal Oswal Securities says that the sentiment in the market is still shaken due to the pace of decline in May.

He adds that the earnings growth has been surprising and there are some signs of overheating in the markets. Agarwal adds that the growth is unsustainable and there has been a 27% topline growth and 34% bottomline growth overall.

He predicts that Q2 earnings may be as good as Q1 and the cost of credit may moderate the growth post Q2.

Excerpts from CNBC-TV18's exclusive interview with Raamdeo Agarwal of Motilal Oswal Securities:

Are you happy at the end of what you have read this time from India Inc?

Yes, it is really surprising. If one looks at almost 1800 companies, which have come out with their aggregate results; the turnover is up 27 per cent and the bottomline is up a full 34 per cent.

Three to four days back it had come to 29 per cent, and since laggards typically come at the end, I thought we would end up with 26-27 per cent, but it ended up with 34-35 per cent. I think that there are some signs of an overheating in the economy and this level of growth is unsustainable, but right now India is going full blast.

Some people believe that this may have been the best quarter for corporate India for the next six to eight quarters; do you subscribe to that theory?

I think the next quarter will be as good. I don't see any disappointment for the next quarter, at least after seeing the performance in this quarter. But after that, as the cost of credit is really catching up and if the expansion of credit as RBI says would be restricted to 20-22 per cent instead of 30 per cent, which it is right now, then there could be some kind of a moderation in the growth rates, going forward. But since things have surprised us this quarter, it would be very difficult to predict anything beyond the next quarter.

Since most analysts were apprehensive about the banking space, how would you map your approach for that sector for the next few quarters?

In fact, the best days for the banking sector have come because they are the lenders of capital and they have huge capital under their network, which is very low cost capital. So for the last three years, till the beginning of this year, bankers were chasing customers whether in retail, corporates, etc.

But now I hear that the large companies are borrowing one-year money at about 11 per cent or so and therefore, now bankers have an upper hand. Clearly, as long as the economy keeps growing at 7.5, 8 or 8.5 per cent, the well managed banks should be able to manage their cost of money and clearly this is the time for them to make money.

My view is that bankers will make money although one part is the bond portfolio issue and I hope that we are closer to the peak of the bond rate. But apart from that, bankers are going to make a good amount of money.

What about the backbone of the Nifty, Oil and Gas and what you would do with that space? What have you made of their earnings?

That is one link in the entire corporate profit performance and actually this year Q1 is looking so good because last year Q1 was so muted, as that was the quarter where the trouble started. That was being compared with the Q1 of the year before, which had a huge oil and gas performance.

Therefore, last year's aggregate corporate profits were muted because HP, BP, IOC were kind-of toned down and around Rs 20,000-25,000 crore subsidy was given either from the ONGC balance sheet or Gail and others.

But this year, after the flattening of profits of HP, BP and IOC, one couldn't have done anything more and so the full blast on aggregate profit is visible this year. I think that things cannot be worse atleast at the level of HP, BP, IOC, than what it was last year, although this year it is looking bad because bonds have  not been credited in the accounts.

How are you feeling about the market at this point, markets have been rangebound, is it going to be a global concern versus a domestic earnings story for a bit?

The markets from the present levels could have been compressed for the following reasons. One is the speculative positions, the second is the earnings disappointment, third is the interest rate and the fourth is the global investor's movement.

Looking at the speculative positions, there are not much speculative positions left. The meltdown has been total. Corporate earnings have been beyond anybody's expectations and they have been very robust.

On interest rates, we have seen a steady climb and that's one factor, which can surprise everybody. In the sense that I would have not expected a ten-year paper to be trading at about 8.3-8.4 per cent, so I do not have a call on that wherever it goes. So that is one worry factor, but that also is linked to the global interest rate scenario. We are hearing that we are somewhere close to the peak in the global interest rate hikes by the US.

The fourth factor is the global investors. India is still pretty okay and people are not pulling out though they are not pumping in money at the pace at which they did last year. Last year we got about $9-9.5 billion. This year, in the first five to seven months, we have just got about less than $3 billion till date. So even if the balance $4-5 billion has to come, we could see some rapid move into that. So the crux is, how exactly foreign investors will behave during the rest of the year.

At Motilal you are in a good position to gauge the sentiment for the market; retail, HNI, PMS (Portfolio Management Service) variety. The volumes have dipped quite a bit in the market, has the sentiment still not recovered, despite the market stabilising quite well on a price platform?

Unfortunately not, because the pace of decline in April-May-June was very steep and most of the investors went through their own pains in terms of either reducing their position or taking the losses or getting stuck with what one bought last. A pretty significant portion of the portfolio with investors is always churned, and one keeps buying and selling at a higher price, then one gets on to the next one.

So I think, whatever one has bought in the last five to six months, they are all below the purchase price. So that is another one visual pain in the portfolio. Despite that, the overall portfolio has done very well for everybody YoY or for the last 15-20 months or least three years. So once psychologically the loss sinks in, the market stabilises and people start realising that on the whole they have done well, I think things will recover. The markets are in a state of shock; even the FIIs are a bit hesitant to put in a lot more money. So time-wise, some unease is there.