Though the September 2016 quarter will be better than the previous quarter for India Inc, there is still the possibility of an earnings downgrade to the projected earnings growth of 22 per cent in FY17, according to Suhas Harinarayanan – Head of Equity Research, JM Financial Institutional Securities. While the recently beaten down IT services stocks look a good contra-buy, he likes private banks, non-banking finance companies, domestic market-focused healthcare, and consumer discretionary (two-wheelers). Excerpts:

Do you expect a correction before any rally (if any)? Why?

A possible downward revision of the projected earnings growth of 22 per cent could lead to a correction in the near term.

How do you see the valuation of India’s equity market compared to its emerging market peers?

On an absolute basis, the Nifty has been trading at a forward P/E of over 17.3x, higher than its 10-year average of 15.6x. The difference in PEG (price-earnings to growth) between the Indian market and the broader EMs has narrowed down due to the higher earnings expectations for the Indian market.

What is the investment strategy in terms of stocks, sectors and market capitalisation?

It is recommended to assign higher weights to private financials (banks and NBFCs), domestic-centric healthcare, and consumer discretionary (two-wheelers), while maintaining tactical overweight in IT services. In our last strategy report, we recommended trimming of mid-caps given diminishing risk-reward.

What is your expectation from the quarterly results?

Revenue of Nifty companies is expected to grow 7 per cent year-on-year in the September 2016 quarter (compared to 3 per cent in June 2016) and net profit at 9 per cent akin to Q1. The performance will be led by industrials and consumer discretionary sectors on likely impact of rolled-out Pay Commission, one-rank-one-pension (OROP) as well as rural recovery.

Telecom and financials are expected to drag down the overall performance in terms of growth.

Have you started liking infrastructure sector with improved investment climate (for fund-raising) and order inflows pick-up?

Although there has been a significant pick-up in asset sales and order inflows with acceleration in road and railway capex (almost doubled), not all companies are in a good position to benefit. The mixed bag of companies consists of some which are well set with their balance sheets built up, while some others are in a poor situation.

Would you be a contra-buyer in IT, telecom?

Yes, in IT services now. In telecom, not immediately but sooner or later because another 10 per cent downside would drive valuations lower.

Also, as opposed to prior expectations, incumbent telcos are in a better position to defend their market shares given the recent spectrum purchase.

Free cash flows and deleveraging should finally begin because capex is peaking and there are no significant spectrum purchases on the horizon.

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