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18-20% earnings growth may cheer mkts: Raamdeo Agarwal

Published on Tue, Apr 15, 2008 at 18:14 | Source : CNBC-TV18

Updated at Wed, Apr 16, 2008 at 15:35

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Raamdeo Agrawal , Motilal Oswal Securities

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Raamdeo Agrawal of Motilal Oswal Securities said the market would gain confidence from earnings growth of 18-20%. Investors are waiting for confidence in the market to increase buying, he said.

According to Agrawal, it is a challenging time for technology stocks. "One can look at the tech sector as a contrarian play post correction. The selling in the market is overdone. We can see some interest coming back," he said.

Excerpts from CNBC-TV18's exclusive interview with Raamdeo Agarwal:

Q: Infosys - what did you make of the guidance and what to your mind is fair value for the stock now?

A: This is the most challenging time for the Indian tech companies because they get about two-thirds of their revenues from financial sectors in US, which is completely under cease because of subprime loans. And in this kind of a headwinded environment, if the company's are able to do 20-21-22% dollar growth because that's what really matters - at the end of this, currency translation is very transitory thing, and of course it matters in terms of accounting. But very little can be done out there. So 20-21% kind of growth and my sense is that the quality of business is so good, giving around that kind of a P/E multiple 18-20 not out of vengeance, here it leaves a little margin of safety.

Q: What's your call on the market now? Earnings season has just began, we have seen the barely first few numbers - do you think the market is slowly trying to get out of the woods and will manage to do or will we have to be resigned to a trading range for a while longer?

A: My sense is that if earnings come as expected at about 18-20% over last year for Q4, I think market will tend to get its confidence back and then will look forward to the next quarter and so on. But that, everyday just taking a cue from what is happening in Wall Street or some other market and just going down with them as if they are completely - I mean their own earnings have been tied to earnings from those markets. That particular phenomenon will get so-called decoupled and market will find its own direction which is happening for the last one-week. One of the things I found when I was in US last week was that people are looking for confidence in the market and then after sometime once the confidence comes back for sometime, I think we are going to see lot of buying from a lot of hedge funds as we go forward because markets were looking for some positive sign in the market that would be confidence giving for the market.

Q: The other sector which rallied today is pharmaceuticals where do you stand on that, that was a big under performer last year as well, has shown some signs of bottoming out the way Ranbaxy moved 10% today are you more hopeful on that space?

A: I'm more hopeful on Ranbaxy's performance because their first two file initiatives have been lined up for starting from this year to next 3-4 years, and now eventually Lipitor and Nexium, all those things are in the visible range of 2-3 years. So the markets will start building some kind of anticipation, right now in current valuations, I don't think anything positive is built into the current price. But as the event comes closer, I'm sure that the markets will start building little more positive valuations on that.

Q: What's your sense of midcap IT valuations? Those got crunched down to between 8-9-10 kind of PE multiples and last couple of days they have all rallied more so today after hearing Infosys out - do you think valuations justify more upside there in that space?

A: IT is looking to be a very large contrarian sector. In 2000 it was the darling of the market and in 2007 it has been crushed completely as if the whole India story on IT is over and more particularly for the midcaps. Largecaps still survived with 14-15 kind of PE multiples and the midcaps got crushed to 5-6 kind of a PE multiple. So I think market has overdone on this issue and my sense is that as the confidence in the sector comes back, the reward in some of the select IT midcaps investing could be pretty good.

Q: Of course one other pivotal event lies ahead of us at the end of the month which is the RBI monetary policy, how much of a headwind is that for the market, inflation at such high levels and the fear of some monetary policy tightening, which is keeping rate sensitives under check, do you think that has the potential to stop this rally or upmove or do you think we'll cross that hump as well?

A: This rally is happening with that event in mind. I'm pleasantly surprised that they banned the export last weekend and markets didn't react that much. So I think what is happening is that pessimism and lot of bad news is already build into the current prices and the speculatory position that the market is literally come to a wafer thin more like 32,000-35,000 crore.

So I think the combination of pessimism which is build in and the confidence in the earnings announcement, which is there and the issue is that are they going to do very dramatic tightening of the monetary policy. Because they know that if they tighten the money supply or availability of credit, what will happen is that they will not get the growth and they may also not be able to build on the inflation. So they will get worst of both the sides, in the sense that they will get very low growth and very high inflation, which they are not going to bargain for it and Central Bank understands that very well.