Apr 12, 2013, 11.17 PM | Source: CNBC-TV18
Given the dismal Q4 earnings, Jyotivardhan Jaipuria, head of research, BofA Merrill Lynch expects IT giant Infosys to see a slew of downgrades soon.
Jyotivardhan Jaipuria (more)
Founder & MD, | Capital Expertise: Equity - Fundamental ,IPO
Infosys' fourth quarter revenue came in much lower than expectations, net profit was slightly higher-than-expected at 3 percent year-on-year due to higher other income and lower income tax expenses.
Continuing his bearish tone Jaipuria said, earnings pain for the broader market is likely to continue going ahead. The broking firm remains underweight on FMCG pack. The FMCG stocks are poised for a downside if earnings disappoint.
Earnings growth will see a boost only if implementation of reforms is seen by the government, he added.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: How are you calling IT given what you just saw from Infosys?
A: We were neutral IT, we were not overweight on it, like a lot of our peers. That was simply because I was worried about the price action. Since, the last results, the IT stocks had done very well.
My worry was, given that IT had done well and a lot of people have positioned themselves in IT, this was something that would disappoint the results. So, obviously, in some sense we were right, but in hindsight one can say we should have been underweight IT.
Q: What will this lead to, more polarization of ownership in the sector, gravitating to a couple of the outperforming names or do you think people might per se become a bit less bullish about the sector at large?
A: For the sector it was we have seen very strong performance in most of the names. So, basically in Q1, if IT performs very strongly, pharmaceutical sector performed very well and a lot of the others did very badly.
So, to that extent, now that performance will probably give way. Performance will get a bit more neutralised and of course within the sector, people will go to the names, which are doing better. This is a phenomenon seen over the last three years where people have shifted to stocks, which have done better and have outperformed the industry rather than stocks which have done badly.
Q: Does it look like you will see significant downgrades in earnings expectations even after this quarter?
A: I think there will be. If one thinks of FY14 consensus bottom up numbers, those are like 17 percent growth, which looks totally out of whack with what is happening in India basically. There is a clear slowdown in India, margins are under pressure. If one sees core inflation that is close to 4 percent only.
So, to that extent, I think the numbers are just too optimistic, they will get downgraded significantly. I was looking at it coming below into single digit somewhere. I was thinking more like 8 percent. Hopefully, we will get 8 percent soon. People might start questioning whether 8 percent is also an optimistic number.
Q: You are saying 8 percent for all of FY14?
A: Yes, that is right.
Q: What would that mean for the market?
A: Though the analysts have a much higher numbers, a lot of the market somewhere has factored that these numbers are going to get downgraded. If one sees the trend for the last two and a half years, that is what has got played out. Analysts always start with a very high number for any fiscal year. Even if we take FY13, you go back 15 months, people were looking at a growth of some 18-19 percent.
We will probably end the year something at C4 maybe 5 percent. So, market has somewhere factored in that we are not going to get those analysts numbers. We will get downgrades, what I guess people not factoring is the extent of downgrades maybe. However, I would say most people mentally are thinking it is going to be more like 10-12 rather than 17 which is there.
So, my view is it is probably going to be 8 or something. The real thing for the market is can we get something changing. Can we either get rate cuts, which are strong and people think okay. This is like the bottom and we probably have a better phase going ahead or we get some government policy action which starts at least kick-starting projects in someway ahead of election.
So, what people want is the change -- things are very bad, things are going down but are we getting some policy action which gives us some hope that things will change soon.
Q: Is there a fear that if the delta of earnings is just marginal 2 percent over the last year, valuations might contract in 2013?
A: Yes, the valuations will contract if the view is that the next year is also going to be a bad year. This is a very odd year because it is the election year. So, for a lot of people it will soon become what is the nature and shape of the next government which will determine valuations.
However, like we get some action like we get some steep Reserve Bank of India (RBI) cut then people will say okay. We are getting somewhere close to the bottom of the earning cycle and we will pick up. If one just step back and think of the numbers, margins in FY13 are probably going to be the lowest we have had in the last eighteen years. Last time, we had margins were lower than this was probably in some 1994 or something.
So, there was a view that okay, with margins having fallen so much at some point had to revert back to mean so should we buy these. Are we buying at the bottom of the earnings cycle in, which case we maybe having three years of very strong earnings growth ahead of us probably that starts in FY14. However, somewhere in FY15 we could get that. That is the reason people nibble at the bottom hoping that they have caught low on the earning side.
Ashwani Gujral, Fund Manager at ashwanigujral.com
Ashwani Gujral of ashwanigujral.com recommends buy
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