Inspite of Infosys and IndusInd Bank reporting good Q1 earnings, Rajat Rajgarhia, Head of Research, Motilal Oswal Securities is not upbeat on the overall earnings. In fact, he expects them to be quite bad. "We are looking at probably the lowest sales growth in the last 10 years in this quarter.Earnings growth will be zero for the entire Motilal Oswal universe or Sensex 30," he adds in an interview to CNBC-TV18.
Lot of expectations in the market for earnings growth was based on hope - hope of monetary easing, hope of currency stabilising, hope that there would be industrial recovery etc; but hope he says will have to get postponed for few more quarters. So, at best one can expect an earnings growth of about 7-8 percent, he adds.
Stock specific, their target on Infosys remains at Rs 3,100.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Earnings season has not started too badly with Infosys and IndusInd Bank. What do you expect to see for the rest of it?
A: Usually, in the first half of earnings season some of the better growing companies report and we have seen both IndusInd and Infosys coming up with a pretty good set of numbers and the stocks have also responded well.
However, for the rest of the quarter, the earnings growth is going to be quite bad. We are looking at probably the lowest sales growth in the last 10 years in this quarter, barring those global crisis quarters. The earnings growth will be zero for the entire universe. Whether you look at Motilal Oswal universe or Sensex 30, there will hardly be any growth this quarter.
So you will have a similar story where some of the better growing companies will report in the first 25 days and some of the degrowing companies will report in the later 20 days.
Q: What implications does this have for the quarters going forward? How far back have you pushed any kind of sustainable earnings recovery to?
A: All the earnings recovery that we, or the street is looking at would be a function of two things. First, is a very low base because for the two quarters in a row now we are growing at just about zero percentage, and at some point of time this low base itself will maybe enable for some growth to take place?
Second is hope. We have been hoping that there would be some monetary easing, it did not happen. We were hoping that currency probably would remain stable at 56. Then we were hoping that there would be some industrial recovery after seeing zero growth for last few quarters, but there again you saw on Friday, the number was another negative.
Therefore, I think that hope is getting postponed by few quarters now. For this year as a whole, I think at this point of time the best expectation would just be about 7-8 percent kind of earnings growth.
Q: Do you think the market can move higher from here, or do you think kind of tepid earnings growth for the second year running presents a challenge from these kind of valuation levels?
A: It is a very big challenge for the markets to move any higher from here. As we have been mentioning that this market has kind of become a market of two kinds of spaces; one is a combination of technology, consumer, pharma and private banks. Those sectors in aggregate are still growing at 15-20 percent and their stock prices are also reflecting that kind of a growth. Two, you have the rest of the market where earnings are actually degrowing and those stocks are not doing anything.
One of the important driver for the market that has come over the last one month to take it higher has been Reliance, where some element of positivity has now come in driven by multiple factors.
If some of the heavyweights like ITC, Infosys, Reliance, HDFC Group move higher since they are still doing okay, the index would still be moving closer to its high. However, I guess the broader market would still be making newer lows.
Q: What kind of bottom-line hit are you priming yourself for through this quarter and the next one because of what has happened with the dollar versus the rupee?
A: As far as the earnings rate is concerned it is quite surprising that the rupee depreciation does not lead to any kind of earnings cut. Today, 40 percent of your earnings at the market level are dollar denominated, so those companies actually benefit whenever rupee depreciates.
What comes as a hit is on the remaining 60 percent of the market where their valuations stakes are knock-off. So you may not see an earnings decline, but you will see a valuation correction happening for the market because of the rupee depreciation.
Q: Are you a bit surprised that Oil and Natural Gas Corporation (ONGC) is languishing at Rs 295-296 post that gas price hike. It seems to have been completely brushed aside by the market?
A: Yes, it has been quite a surprising underperformance over the last few days or last few weeks. Right after the day when the gas price hike was announced, ONGC had shot up to Rs 350, but very quickly it has again come back to the lower end of the range.
We have heard many investors saying that a lot of the good news has already been front-loaded whether it be diesel price increases or gas price hikes, but there are two other negatives which maybe building up during the rest of the year. First is that the rupee oil prices are now its all-time new high and secondly, given the kind of pressure you are seeing on the fiscal front, the upstream is most likely going to bear more than what the street is factoring in. Therefore, it is more a case where positive news came in but negative news anticipation continues to be there.
Importantly, the entire PSU pack is going through a significant de-rating process, be it National Thermal Power Corporation (NTPC), Coal India, Bharat Heavy Electricals (BHEL), State Bank of India (SBI) etc. and while ONGC is outperforming within the PSU pack, one would still like to see more definite action before they load up further on this stock.
Q: Stocks like Maruti and Mahindra & Mahindra (M&M) have come off quite sharply - are you guys bringing down estimates for the whole auto space and what that can do in the next few quarters?
A: At least for this quarter, the auto pack is going to see downgrade in the estimates. We were positively surprised by the resilience of Maruti numbers in the January-February-March quarter, but for April-May-June we are seeing numbers drifting down.
Almost all the three, top four wheeler companies be it Tata Motors, Mahindra and Mahindra, Maruti over the last one month have announced production cuts. Many of these companies would just be cleaning the inventory ahead of the festive season, so that in itself takes some sheen off from these stocks.
More importantly, we have to be hopeful that at least this festive season would kick-in some demand for these companies. The underlying demand in the system is very, very weak, not just for autos, but almost everything which is reflected in the Index of Industrial Production (IIP) number, the cement volume numbers, everything. Therefore, autos are no different. So, unless you see some kind of a recovery you are not likely to see any stability to the earnings of these companies.
Q: You guys have a fairly aggressive price target on Crompton Greaves. Do you think the worst is in the price? Do you think this buyback will do something to support the stock?
A: If you look at the company, while their standalone business operations have been doing okay in these difficult times, the offshore subsidiaries one after another quarter has been disappointing badly which has reflected into the bad stock performance also. We think that the domestic business itself which is right now going through a cyclical downturn remains pretty valuable.
As far as the offshore business is concerned while we keep on getting updates that they should be doing something better in the quarters ahead - that quarter is still getting delayed. However, at some point of time when you see the overseas business stabilizing, you will see some restoration of confidence coming back. The buyback that they announced has seen some delay as per the latest notice, but could provide some stability once it gets implemented.
Q: How much have you taken up your estimates or price targets on Infosys post-Friday?
A: The estimates are right now marginally higher by about 2.5-3 percent, but the price is closer to Rs 3,100 now. After the big jump that we have seen, while the estimates have seen just 2-3 percent upgrade, the PE multiple has been upgraded by about 7 percent just based on the price action of Friday itself.