Earnings momentum starting to slow down; margins may falter in Q4 & Q1: Pankaj Tibrewal

Earnings momentum starting to slow down; margins may falter in Q4 & Q1: Pankaj Tibrewal

Pankaj Tibrewal, Founder, IKIGAI Asset Manager, says “earnings momentum is starting to slow down. In the third quarter, we saw that maximum earnings growth came from improvement in margins, which I believe, from the fourth quarter onwards and to the first quarter base, may not be that favourable. Also, margin levers have started to be missed and the top line growth is sluggish at about 3%, 4%, 5% for the NSE 500 companies.”

Tibrewal also says one should avoid low free float stocks, checkered promoters, checkered management teams amd balance sheets where there is a reasonable amount of leverage.

What a name for a fund, Ikigai. It is inspired by a Japanese philosophy, stay calm, stay still, right?

Pankaj Tibrewal: It means purpose of life.

Purpose of life and is that the entrepreneurial spirit now for your new venture? Pankaj Tibrewal: Absolutely, every one of us has Ikigai inside them and the basic purpose, the motto of the firm is trust, process and performance and can we discover the compounding of ikigai which we want to do on the wealth side for every investor of ours.

Let us understand the way forward now. You have been calling out for a correction in the mid and the smallcap space, the correction has happened. Is the correction deep enough to warrant a revisit in small and midcap stocks? Pankaj Tibrewal: So, let us look at the data. Over the last month or so mid and smallcaps have corrected. The index has corrected by about 9% to 10%. We believe that the recent correction is very small compared to the larger returns in the past one year and three years and still believe that excesses are there in certain pockets in the smallcap especially and in the SME part of the market. We believe that the market has started to take cognisance of that and whatever excuse may give, it has not come as a surprise to most of the market participants.

We believe there are three-four indicators we need to keep in consideration. One is the profit and the market cap distribution. If you look at mid and smallcaps as a percentage of total overall market cap, it is about 35%, whereas the profit distribution is about 25%. Still there is a decent gap between profit and market cap distribution as we speak.

The second is that if you look at the trailing earnings yields minus bond yield, it is at the worst level for mid and smallcap since 2005 and history suggests that the next 12 months generally tends to be negative once you get that ratio.

The third part is that from the last one, one-and-a-half months, the median returns of the index was already negative or inferior compared to the index returns in mid and smallcap, that means the larger pocket of the market was already seeing correction , whereas the index was holding up because of the few heavyweights in the index itself. I think that started to show that the breadth of the market was deteriorating. And in my view, it is just probably the start, earnings momentum probably has started to slow down. In the third quarter, we saw the least number of positive surprises in the last seven-eight quarters and the liquidity is extremely tight at the ground level.

When I am speaking to industry participants, the sense that I am getting is that demand is also slow and liquidity very tight, which means the working capital cycle will get elongated for a lot of companies as we move into the fourth and the first quarter. Finally, at some point of time, stocks are a slave of earnings and if there is earnings disappointment going ahead, then there could be pressure on certain sectors and markets. We feel still some time has to go before we start bottom fishing in the markets from a mid and smallcap perspective.

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