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?

Kotak Insitutional Equity Conference kick starts on February 1, showcasing some of India's biggest company.

In an interview with CNBC-TV18, Sanjeev Prasad, Executive Director & Co Head, Kotak Institutional Equities spoke about his reading of the market and his outlook.

Below is a verbatim transcript of the interview. Also watch the video.

Q: Your keynote speaker [at the conference] is AM Naik of Larsen & Toubro (L&T) and that arguably is what started the rot in the market. Have you downgraded it?

A: No, we still have a positive view on the infrastructure sector in general in India and on the L&T stock also. There have been some earnings downgrades following somewhat less than expected performance of L&T in this quarter. But the long-term story, as far as infrastructure development is concerned, is pretty much intact. So I don't think one quarter it is going to result in investors taking very negative view of L&T and similar stocks. We are still okay with the infrastructure space in India.

There would be one or two quarters of the execution related issues but once we cross that hump, growth will come back in a bigger way this year.

Q: By Monday you will have a clearer handle on the earnings performance for the market as a whole. How is that looking because Q3 doesn't seem to have blown the lights out?

A: Yes, unfortunately that is true. We started the quarter with very good numbers from the technology companies and then you had the private banks also reporting somewhat decent numbers. After that it has been less than expected performance from most of the companies that reported after that barring a few companies like maybe ITC and some of the public sector banks, which reported decent numbers. In general, there have been more disappointments and if you look at our own earnings numbers - the earning season is still not complete but out of the 21 BSE-30 companies that have reported the numbers, before the start of the earning season, we were looking at about 4.3% growth for BSE-30 index for March 2010 year and about 21% for next year.

As of now, after these 21 companies reported numbers, we are looking at about 2.9%. So obviously there have been some downgrades, particularly in energy sector and infrastructure space. For next year, we are still looking at about 21%. So hopefully that is intact. I won't be too much concerned about these 1-2% downgrades on the earnings on an overall basis as long as 2011-2012 earnings numbers look intact.

Q: What is specifically have you downgraded in energy basically Oil & Natural Gas Corporation (ONGC) numbers or something else as well?

A: ONGC and Reliance we are keeping a flat at about Rs 48 this year. So there is no change over there. But clearly ONGC numbers we had to take down based on certain government policies. It would still be that the government may issue the full amount of under-recoveries for cooking fuel in Q4 for the full year and that would obviously boost the numbers for the downstream companies. Also result in less transfer of subsidy from upstream companies to downstream companies in Q4. So if that will be the case then ONGC numbers will be looked up smartly in Q4 but let us see what the government does as respect to the under-recovery issue.

Q: Not so much the downgrade but do you think the upgrade cycle will lose some momentum after the current quarter because that was the expectation that you will have a strong Q3 and that will speed on the pace of earnings upgrades going into next year. Is that process just stalling a little bit?

A: Yes, unfortunately that is a concern, which is reflecting on the market coming off to some extent and I guess that is one of the factors apart from whole three-four factors which are weighing down on the markets currently. There is a general expectation that you would see the cycle of earnings upgrades picking up from this quarter but doesn't look like that is going to be the case. We will have to wait for one more quarter to see if earnings numbers surprise on the upside on an overall basis.

So as of now, it is not too bad a scenario - compared to 4% if you are looking at 3%, I don't think that is the end of the world. So far 2011 numbers, our analysts are still looking at 20% of growth which is very similar to what we had at the beginning of the result season. So expectations may be running ahead of reality so there would be some tempering of expectations but at the ground level, I don't think things have changed that dramatically that people should take a very negative view of earnings going forward.