Rajat Rajgarhia, head of research of Motilal Oswal Securities says aggregate earnings growth so far have come in mildly higher than estimates. India Inc may not be fully out of the woods, but, a large number of companies are beating analysts' estimates this earnings season.
According to Rajgarhia, companies are indicating demand revival going into the festival season. "The number of positive surprises in the universe has been almost 3:1 versus the negative surprises and lastly based on the 18 Sensex companies that have reported, there is a very marginal uptick in the full year Sensex EPS estimate for FY13 and FY14," he told CNBC-TV18.
However, he says, there are still some signs of slowdown in consumer discretionary and the underlying environment for capital goods remains "very challenging".
In terms cues to watch out for, Rajgarhia says, the market is awaiting asset quality data from State Bank of India (SBI).
Below is the verbatim transcript of Rajgarhia's interview on CNBC-TV18
Q: Earning season is almost over. What are your takeaways from it? Were there more upgrades or downgrades at your end?
A: This earning season has been fairly good. For the aggregate of about 70 companies that have reported in our universe till now, they have delivered some 21 percent growth versus our estimate of 18 percent. But these growth rates will come down. Some of the large PSUs and global business models like ONGC, Coal India, Tata Steel, Bharti etc are about to report. They will pull down the growth rate. Till now, the earnings growth at the aggregate level has been good.
Secondly, the number of positive surprises in the universe has been almost 3:1 versus the negative surprises. Lastly, based on the 18 Sensex companies that have reported, there is a very marginal uptick in the full year Sensex EPS estimate for FY13 and FY14.
Q: What are your views on some of these consumer stories like Titan Industries, Bata India and VIP Industries that have reported a slow down in sales? Are you seeing start of sales petering off from here and what would your outlook be on some of these names?
A: Last couple of quarters have been tough for a lot of these consumers discretionary. The stocks we cover are Titan Industries, Maruti Suzuki. Asian Paints we had just 3-4 percent volume growth in first half. So, it was expected that the numbers are going to look bad. But Maruti in recent concall started talking about things looking back again. Even Titan in their concall started talking about things looking back again.
So, this festive season, month of October has been good for companies. They are guiding for November-December to be better. That is what markets are started to price in. If you look at stocks like Maruti, Titan - a lot of them have again started trending back to their recent highs. So, at this point of time, we are more positive on some of these names because we think that the last two quarters of slowdown is behind and the numbers should show some gradual improvement for them.
Q: Of the numbers that you have outlined, the big ones which are still to report, State Bank of India (SBI), Bharti, ONGC, Tata Steel - which ones are you most apprehensive on that there might be significant disappointment?
A: Within the PSUs, for ONGC, a lot of the things generally are known based on the discounting that they have to do. But on Coal India, it will be very important to see what the e-auction realizations are because there have been talks during the quarter that the prices have seen some correction. So, I think that is one very important variable that investors are apprehensive about.
As far as SBI is concerned, there is just one number that everyone wants to look at which is the gross slippage number. The trends from the three other large PSU banks have been disappointing. SBI’s June quarter gross slippage numbers were very bad. So, I think these are the two big numbers within the PSUs.
Amongst the others, Bharti is always an interesting number because the profit has been making a new bottom now for almost every quarter that they have been reporting. We hope that at least in this quarter there is some stability or some improvement in the underlying matrix.
Q: After seven months of a sluggish growth, we are seeing some rebound in the infrastructure segment in terms of the core sector data. Within this pocket itself, are there any stocks that give you a conviction to add into your portfolio now or is there still some more time to go?
A: Within the capital goods space, L&T has been one standout or standalone business model which has been very resilient. Their markets share in the segments that they operate in would be the highest in the last many years that they have been operating. More importantly, Thermax in their conference call also started talking positive where they are expecting some orders to now start flowing in whether it is some of the refineries or whether it is some of the cement companies which have started to do some capex.
So, we are seeing some very initial signs of some positive commentary coming. But on the other hand you have BHEL where the order book to sales ratio is now the lowest in the last many years. So, it is a very mixed trend. For some months, you may get deviated by the base number also because last year, September-October onwards, the base had started looking very bad. So, you may have some months of bumpiness in the numbers. But I think the underlying environment is still very moderated as far as the infrastructure/capital goods is concerned.
Q: Where do you stand on Wipro? That announces results tomorrow, very late in the season, there is a lot of talk in the market unconfirmed that they are looking at the demerger of some of their businesses. Any chances of it ending its under performer tag?
A: The under performance will only end when the dollar revenue growth for them starts bouncing up again. Over the last six-seven quarters now, IT has become a divided space where there are two companies - TCS and HCL Tech, which continue to do well quarter after quarter and two companies - Infosys and Wipro, which have been under performing the sector quarter after quarter.
So, till the time this phase of under performance on the business does not stop, the under performance on the stock will not stop. Right now that has been one hope that investors have been looking for the last two-three quarters from Wipro. But I guess they have actually seen last two-three quarters getting more disappointed. People would like to see the definite numbers before they take a call on the stock.
Q: LIC Housing Finance is on the top overweight list. That stock has moved no where in the last six months. What did you make of the numbers they reported yesterday and what kind of an upside do you see on the stock going ahead?
A: This quarter was expected to be bad for LIC Housing Finance. The numbers turned out to be even worse than what we were expecting because the margin contraction for them was higher. But the two other important things are - their disbursement growth remains very strong at 20 percent plus. The gross NPLs this quarter fell 12 percent quarter over quarter. Margins in our view have bottomed out this quarter because it should start rebounding now given the benefit that they will see on the wholesale funding costs.
More importantly this is more 20 percent RoE business. It used to trade at 2.5 times price to book plus, till about six quarters back. The stock has done nothing over the last six quarters because of which that 2.5 times has now moderated down to 1.5 times one year forward. I think housing financing business with next five years earnings growth compounding at 20 percent and 20 percent RoE, 1.5 times book is a very good entry point for investors into this stock.
Q: What are your top picks at Motilal Oswal in the pharmaceutical space because some of names like Glenmark etc have turned in very good numbers for the quarter? Which ones are your best bets?
A: We have been maintaining the stand that pharmaceutical is a very standout sector where every company is a different business model. If you look at the management guidance, they are significantly above what the street has been estimating.
Almost for two quarters in a row for FY13, people have been upgrading their estimates for the sector. This process will continue not just for FY13 but even for FY14. But there is no common theme which works across the companies. So, we have our own individual bottom-up picks in pharmaceutical.
The top pick is of course Dr Reddy's because we think that what they are delivering now on a quarterly run rate will lead to more round of upgrades for people for both FY13 ad FY14 and again this is one stock which has consolidated very well now for the last five-six quarters.
Second is Divi's Lab because they have now proved that the business model for them is significantly scalable. The kind of return ratios that they are now delivering with virtually no capital commitment, can make this stock look very expensive in the years to come. So, these would be the best two picks from us Dr Reddy’s and Divi’s Lab.
Q: Today is the digitization deadline. Any picks you have on the media space now? How are you approaching this entire sector?
A: This is one event that investors have been waiting now for long. With this event now happening, you will see the positive impact of this coming into the space. The most worthwhile stock in the media pack to play this entire event is Zee because Zee is not just a play on this particular event.
If you look at the last two-three years the way the entire balance sheet got cleaned up, now they did the buyback, they have a very good dividend policy plus on top of it, if you look at the programming, there also they have started making some good inroads.
You are going to see ad revenues bottoming out soon. You will see subscription revenues picking up well. There will be some margin pressures for them because they are investing more. That remains a keenest play for investors to bet on this event.