Chasing growth: Kotak's sector/stock outlook post earnings

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: Did you have a chance to look at DLF 's numbers?

A: I think the topline came ahead of expectations, which means that execution especially in Chennai and Gurgaon is what the analysts are factoring in. The disappointment seems to be more on the margin front where I think EBITDA margin has come of something like 10% compared to Q3 as well as Q2 of this year, which means probably we are seeing more of execution of the mass market houses compared to premium budgeted segment which were there earlier. But I guess the good thing is that execution is taking place.

At the net level, numbers pretty much came in line with expectation at about Rs 4.7 billion, we were expecting about Rs 4.6 billion of net profit, so not much of a positive surprise over there and the topline did pretty well compared to our expectations.

Q: Would you be comfortable buying at these prices - frontline IT and autos?

A: We are still okay on frontline IT. However, the valuations are not that much in your favour but the earnings momentum is there. If you look at something like a Wipro - that doesn't look too bad. It is about 17.5 times on 2011 numbers and going forward if you have one more year then you are looking at somewhere about 15.5 kind of price earnings ratio for a pretty high quality name. So you can still look at the high quality top three IT names.

I am less comfortable with autos because 2010 effectively was a very good year in terms of both, very strong volumes as well as very high margins. I am not too sure how much of that is going to sustain going forward because in 2011 you would see a reversal of a lot of positive factors, which will be there in 2010. So, some of the one of volume growth which was there because of excise cuts or cash-for-clunkers schemes in Europe etc, that will all go away this year. More worrying sign is on the EBITDA margin because volume growth will still continue at about 12-13% for most of the sub-segments.

But on the margins clearly you would see this year commodity prices being higher than what we saw last year and more of competition coming in. So whether the kind of margins we have seen for a Hero Honda at about 16%, for Mahindra & Mahindra (M&M) 16.5% - whether those kind of numbers will sustain, I am not pretty sure. My worry would be more on the margins as far as autos are concerned.

Q: You were talking about the private banking space. What about the PSU fraternity? Did that go down okay with you from what you have seen so far?

A: Most of them have done quite well. One area of concern seems to be the non-performing loan (NPL) side where Punjab National Bank (PNB) and Union Bank reported slightly higher NPL compared to what our analysts were factoring in. However, the loan growth continues to be very strong.

Net interest margins (NIMs) in general expanded anywhere from 10-35 bps for most of the PSU banks that was more or less on expected lines. You are not seeing that much of impact on specially books of these banks. Valuations are still very good. If you see PNB for example, we are looking at about 1.4 times of 2011 price to book. Union Bank is about 1.3. Bank of Baroda is about 1.3.

Based on a combination of very nice valuations and the fact that you would see NIM expansion as well as volume growth coming back significantly, there is about 20% credit growth. This is what we are looking at for the industry as a whole next year. Public sector banks are still in a very good position for investors to look at.