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Three Of The Four Key Indicators Are Pointing To Earnings Upcycle, Says UBS’ Gautam Chhaochharia

India is poised to see a broad-based earnings upcycle as three out of four key indicators followed by UBS flash positive.

A water and oil gauge cluster is seen in the Nissan Motor Co. Titan Warrior concept pick up truck during the 2016 North American International Auto Show (NAIAS) in Detroit, Michigan, U.S. (Photographer: Andrew Harrer/Bloomberg)  
A water and oil gauge cluster is seen in the Nissan Motor Co. Titan Warrior concept pick up truck during the 2016 North American International Auto Show (NAIAS) in Detroit, Michigan, U.S. (Photographer: Andrew Harrer/Bloomberg)  

India is poised to see broad-based earnings upcycle over the next one to three years as three of the four key indicators turned positive, according to UBS.

“After being bearish on India’s growth for the top down for the last five years, we do see the building blocks for the next earnings upcycle in a broad-based way in the next one-three years, using our own metrics,” Gautam Chhaochharia, head of India research at the Swiss multinational investment bank and financial services company, told BloombergQuint.

That comes after years of delay in earnings recovery as India struggled with disruptions such as demonetisation, Goods and Service Tax and more recently, lack of liquidity in the banking system. Of its four key elements that determine an earnings cycle—fiscal monetary policy, manufacturing exports, capital expenditure and credit cycle—none of them have been of help in the last few years, despite 7 percent economic growth, Chhaochharia said.

He now is hopeful on three of these. First, the credit cycle which should pick up after repair and recapitalisation of the larger public and private banks. Second, an increase in capital expenditure solely led by property capex, he said, “not because of any policy inputs but the classical cycle from lower launches over the last few years finally leading to inventory-sales ratios being supportive of the next upcycle”.

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Third and the largest indicator is the manufacturing exports story. While global manufacturers look to establish facilities beyond China, the corporate tax rate cut and initiation of labour reforms will make India one of the most attractive destinations among major emerging markets. “A combination of these two at the bare minimum in our view would mean that the manufacturing export story for the next few years will be far better than the last five-six years,” he said.

Other Key Highlights

  • Believe markets should stabilise in the near term.
  • From one-three years perspective, the worst is now behind for small and mid caps.
  • Base case for coronavirus is that the impact will be limited for the first quarter, followed by recovery.
  • Worried about impact of coronavirus on trade issues but that should also bottom out after a few quarters.
  • Confidence in the markets should come back in a couple of quarters.

Watch | UBS’ Gautam Chhaochharia On The Elusive Earnings Upcycle