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Financial, cement companies to do well in Q3: Amnish Aggarwal, Prabhudas Lilladher

Q3 is unlikely to give green shoots as far as the overall performance is concerned. We are underweight on IT because in run up to the US elections, the IT sector underperforms and overall growth rate suffers. In auto, q-o-q, some improvements may be visible and base effect may be favourable, but we are not out of the woods yet.

ET Now|
Last Updated: Jan 07, 2020, 02.10 PM IST
Amnish Aggarwal, Prabhudas Lilladher-1200
The corporate tax cut impact would still be visible because not all the companies ‘had shifted to the new tax regime last quarter, says Amnish Aggarwal, Head of Research, Prabhudas Lilladher. Excerpts from an interview with ETNOW.

It seems like the overall growth for PBT level is in double digits. Low base, the monsoon all are going to aid growth. What are you expecting from the Q3 earning season?
Q3 is unlikely to give you any green shoots as far as the overall performance is concerned. Any growth in PBT is mainly led by financials because of the lower base and some of the write backs which are expected. If you remove that, some of the sectors which could do well during the current quarter are financials and cement. Barring these, most of the other sectors will remain muted.

In Q2, the effect of the corporate tax cut was visible. Some companies were able to report differentiated numbers because of the corporate tax assumptions. How would the corporate tax benefit factored in the current quarter? This is the first full quarter where they will be able to come out with a clean set of numbers.
The corporate tax impact would still be visible because of two-three factors. One being that in the previous quarter also, not all the companies ‘had shifted to the new tax regime. Second, some of the companies with deferred tax assets and deferred tax liabilities, have provided fully in the previous quarters, but not all of them. Some of these companies would have actually the write-backs coming as far as their tax provision is concerned, even in the current quarter. Same goes for incremental provisions. The companies which have already neutralised both these factors, in the new regime they would be providing taxation at 25%.

So. I would say it is still not going to be uniform. In some cases, the taxation will continue to be in the old regime. There will be companies at much below 25% tax rate and there will be some companies paying between 25% and 30%. That is why, from the previous quarter itself. we have been concerned with PBT growth rather than looking at PAT growth. The taxation this year is going to be significantly skewed.

Talking about IT considering later this week you have got both Infy and TCS delivering their numbers. Are there expectations of any positive surprises or would they be in- line numbers?
We are not expecting much surprise from IT in the near term. We are underweight on IT because usually in run up to the US elections, the IT sector underperforms and the overall growth rate of the companies also suffers. We are not expecting any positive surprises to come from IT sector.

ET Now: Where do you think the disappointment could come in? Will it be in autos or banks because of all kind of write downs like DHFL, Café Coffee Day or will it be in consumer stocks where the base effect has now kicked in?

Amnish Aggarwal: It will be very stock specific. For example, some of the private banks will continue to do well. There could still be some skeletons in the cupboards which can come out like DHFL is something which is known but there could be some more incremental provisioning might be required.

When it comes to autos, we might have seen the worst. Quarter on quarter, some improvements may be visible and the base effect may be favourable, but we are not yet out of the woods because BS-VI implementation is still some time away. As of now, it is difficult to say whether we have actually seen the bottom for some of the segments. Maybe passenger vehicles have seen the bottom but for broader two-wheelers or commercial vehicles, we are yet to see the actual bottom being made.

As far as other segments of consumption are concerned, it is going to be very mixed. For some of the companies, we might see sequential improvement happening. For example, companies like Kansai but paint companies in general are not yet out of the woods and growth rates are definitely going to be lower on YoY and in some cases, even on a QoQ basis, the volume growth will be lower.

Coming to the capital goods sector, it appears order activity, overall execution have moderated due to the lower capital expenditure by the government. What are you expecting in terms of management commentary on order growth for the likes of L&T and for some of the other capital goods counters?
The government is in a mood to cut the capex because if you look at Q3, Q3 capex on a quarter-on-quarter basis, the government is down by approximately 5%. Looking at the fiscal condition, the tax revenue collection has been very poor. I do not foresee any significant pickup happening on the government side as far as the capex is concerned.

When it comes to the private sector, the capacity utilisation is not even 70% and looking at the cash flow condition of the corporates, I do not think we would see any big revival happening from the private sector as far as the capex is concerned. So the capital goods sector will remain a long-ish term story. The government is showing its intent to develop infrastructure but expenditure might be slightly back-ended. The order inflow in the near term can suffer but in the longer term, the companies with stronger balance sheet and good visibility will thrive.

What is the outlook on metals because it is expected to be a fairly strong quarter, we have seen some sort of a pickup in domestic steel prices, what kind of trend are you expecting from the metal companies?
Metal companies would be mixed. We are not very positive on the metal companies because they depend on global prices. Currently, for some of the segments, the prices have gone up and that is also reflected in the stock prices. Some steam might still be left but over the medium term, we are not very positive on metal companies.

Pharma is likely to be under pressure from the US generics market and the pricing controls. All that is expected to lead to a fairly tempered Q3 for the pharma companies. What are you pricing in?
The pharma sector continues to suffer from issues which the various companies have with USFDA. At some point of time, there will be hardly any pharma company which today is not having an issue and which is impacting the overall growth rate.

As far as the domestic business is concerned, the pharma companies are doing reasonably well and the growth rates for most of the companies would be at least in the mid to high single digits. That is the reason MNC pharma which are more domestic focussed, have done better.

As far as the Indian pharma companies are concerned, even in the near to medium term, they will continue to be impacted by the issues related to USFDA. That is the reason we are not positive on the pharma sector. Dr Reddy’s is the only stock which we have in our model portfolio.

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