As the earnings season kicks off for this fiscal year, several market experts have constantly highlighted the need to have strong growth in order to match with expensive valuations.
Birla Sun Life Asset Management Company (AMC) sees this quarter's year-on-year growth to be marginally lower. “Some sectors such as the auto sector and some corporate banks could be hit and expect the quarter to be slightly disappointing,” Mahesh Patil, Co-CIO, Birla Sun Life AMC told CNBC-TV18 in an interview.
That said, he also sees earnings recovery in the quarters to come, more so in the second half of the fiscal. The base case, he explained, is favourable with demonetisation and its impact seen during the last year. “Growth of over 25 percent does not look out of the world,” he told the channel.
In the long run, over the next two years, he expects earnings growth to improve, which could compensate for the higher PE multiples. But, for now, return expectations have to be moderated from this level to around 12-13 percent.
On earnings growth for the Nifty index, Patil sees mid-teens growth rate. “This year we started with 19 percent. This was the case around six months ago. Post the last quarter and GST, it has come down to 15 percent,” he told the channel.
Speaking on retail investor sentiment, Patil observed that good, long- term retail money was coming in. Per month, the fund house was receiving investments worth Rs 6,000 crore which make up for almost 40-50 percent of the total inflow.
Patil also outlined his views on several sectors. On banks, he said that as long as the structural story is good for private banks and NBFCs, the exposure to these would continue.
He also sees some pockets of value in pharmaceuticals as well as oil marketing companies (OMCs). Pharma has headwinds, he said, but there are some company-specific opportunities too. Meanwhile, refining margins for OMCs are looking up and valuations are more reasonable.
Below is the verbatim transcript of the interview.
Latha: Challenging valuations, we are repeating this question like a parrot and the market doesn’t seem to heed valuations at all. Would you worry, just keep ploughing in money at these levels?
A: Valuations are high because earnings growth is still elusive a bit. Looking at the near term, again because of Goods and Services Tax (GST), again this quarter you might see slightly earnings -- we are year-on-year (YoY) earnings would be marginally lower than last year for the Nifty if you look at because there are couple of sectors where you would see a hit like for example the consumer discretionary, the auto sector for example, there could be slightly lower, and even in some of the corporate banks. So, as a result this quarter would again be disappointing.
So given that, the higher multiples are slightly a kind of a roadblock when you are looking at investing into stocks. However, I think the outlook going forward – we had this disruption but I think once this quarter and then probably next quarter, I think we are looking at a fairly strong earnings recovery. Again, we are yet to see that, we have not seen that for many quarters now, but I think it looks like the base is favourable and a lot of things are falling in place. I think the earnings are very depressed. If you look at last three years, return on equities (RoE) is at a historical low levels compared to the long term average. So, while the valuations are on the higher side, the earnings are very depressed.
So, there is hope that you would see recovery back to at least the mean levels over the next couple of years and I think that should be okay for long term investors who are looking to invest at these levels that the earnings growth in the next two to three years should be stronger to compensate for the higher P/E multiples. Obviously when you buy something expensive, the returns there would be lower than what something which you could have bought a bit cheaper. So, return expectations I think definitely have to get moderated down from these levels.
Anuj: Looking at your portfolio, there is clearly a lot of focus on banks and discretionary consumption and that we know has been the leadership space. Do you keep adding to these stocks at current levels as well?
A: Banks, especially if you look at private banks, the NBFCs where we would have a larger exposure over there. As long as the structural longer term story is good, we would keep on not really increasing exposure but maintaining exposure in these stocks as we get new inflows because if you are structurally bullish on a stock for the next say three to five years, I think it is important to really maintain the weightage in the portfolio as you get inflows into it.
Yes, there are some headwinds in the shorter term in the consumer discretionary as I mentioned because of GST, but we think these are temporary setbacks like what we saw in demonetisation. The sector got hit and if we had reacted at that point in time, we would have missed that because we saw a good bounce back in some of these stocks after two or three months impact of demonetisation. Similarly, I think in the GST, I think it is a more transient phase. I don’t think the market would also react too much even if the earnings are weaker in these stocks. If the stocks correct, we will be happy to add in some of these names.
Reema: You said return expectations need to be moderated from here on. What are we talking about by way of returns from here on and how much should they be moderated by?
A: If you were expecting say probably a year back, the market would have given return of around 16-17 percent. Obviously with the P/E multiples, assuming the earnings growth has not really changed, and if you take a three year horizon, then you will bring that down by another 2-3 percentage point. So 12-13 points would be a reasonable return to expect for the market over the next say two to three year’s timeframe.
Latha: What are you working with in terms of an earnings growth for Nifty this year?
A: This year, we started off with around 19 percent kind of a growth which was say around six months back. As we have traversed and we have seen the last quarter and then factoring in the GST impact, it has now come down to around 15 percent kind of a growth. I think we have seen some scale back in growth in the banking sector, especially the corporate banks which we had to scale it down a bit over there. Partly in the auto sector and in the media, that is partly to do with GST.
So, currently we are still looking at around mid-teen kind of a growth rate which seems to be a tall order because if the first half is going to be a bit tepid, then the heavy lifting has to be done in the second half. However, looking at the favourable base of what we are, I think it should be quite possible. I think lot of the growth what we are looking at driven by the rural consumption, monsoon, I think impact will start to trickle in mainly from October, I mean after the next the festive season.
Latha: You are expecting 15 percent, you are saying this first quarter, you are going to actually see a fall in earnings, are we okay with a 20 percent growth in the second half?
A: It will be higher than that in fact because -- what happened was last year second half because of demonetisation, there was a significant cut down in terms of earnings. So that base is favourable.
Again, what we are seeing, the GST impact in this quarter is again a transit impact. It is not really impacted the retail growth. So, even a lot of the consumer stocks or whatever you are looking at, it is just the inventory de-stocking which is happening. So the restocking will start to happen from this quarter onwards.
So if you combine these two factors, I think then growth of say more than around 25 percent does not look too out of the world for in the second half.For full interview, watch video...