SENSEX NIFTY
Feb 19, 2013, 06.39 PM IST | Source: CNBC-TV18

FY13 earnings to grow lower at 5%, buy Infy: Motilal Oswal

Rajat Rajgarhia, Motilal Oswal Securities is not so hopeful of earnings growth in this fiscal. According to him, earnings per share growth in FY13 may slip to 5% compared to an estimate of 7% before the third quarter.

Rajat Rajgarhia, Motilal Oswal Securities is not so hopeful of earnings growth in this fiscal. According to him, earnings per share growth in FY13 may slip to 5% compared to an estimate of 7% before the third quarter. 

In an interview to CNBC-TV18, he said, "For FY14 right now the earnings growth is 15 percent and the growth rate looks high because some of the earnings which got very badly damaged this year will be normalised and is likely to push up the growth rate."

Instead, he suggests looking at the two year compound annual growth rate (CAGR), which is likely be at around 8-8.5 percent. 

The main concern of the market is focused on fourth quarter midcap earnings as margin compression and high interest cost may pressurise growth. Rajgarhia also notes that three stocks (Tata Steel, Tata Motors and Bharti Airtel) have led to more than 100 percent of the downgrade in the last 12 months as far as the Sensex earnings are concerned.

However, this has not dented Rajgarhia’s sentiments as he feels there is no reason that Indian market will be re-rated in the near term.

As an investment strategy, his top picks are Infosys, ONGC and ICICI Bank. He sees limited downside for ONGC from current levels as expectations of gas price hike driving upstream stocks higher.

Below is the edited transcript of his interview to CNBC-TV18.

Q: Did your faith in the upgrade cycle is starting off after Q3 earning season go down a notch after the last couple of weeks?

A: Post this quarter, weak breadth of the numbers in the last two-three weeks led to a downgrade in FY13 EPS, which was a negative surprise. This year growth rate looks less than 5 percent compared to an earlier estimate of 7 percent.     

Importantly, three stocks namely, Tata Steel, Tata Motors and Bharti Airtel lead to more than 100 percent of downgrade in the last 12 months as far as the Sensex earnings are concerned. On the other hand most of the large cap performed reasonable.

Q: What is your estimate for upcoming quarter and what kind of Sensex EPS are you working?

A: We expect FY13 EPS growth for full year to be around 5 percent. However, we feel that earnings growth in FY14 to be at 15 percent, which is high. Earnings of companies like Tata Steel and Bhart Airtel etc, which was badly damaged this year is likely to normalize and will push the growth rate up.  

We expect two year compound annual growth rate (CAGR) in corporate sector to be around 8-8.5 percent.

Q: You are not buying the market’s enthusiasm about what JLR may do to bail Tata Motors through?

A: This quarter numbers from JLR was a positive surprise and is providing a big boost. Tata Motor’s domestic business continues to surprise negatively which is leading to the earnings downgrade at an aggregate level. The domestic business model also faces cyclical low earnings and the market will not pay low valuation as it received earlier. The stock looks to stabilize at around Rs 300 due to JLR.   

Q: What is your view on midcap earnings because while the Sensex aggregates are one thing they often tend to mask the reality of the broader market? Where there many more disappointments outside the index and more downgrades?

A: In this quarter many companies missed our EBITDA estimate, especially midcap companies. The current environment is against mid cap companies where they are unable to increase their revenues, raw material cost is increasing, and interest cost is almost at an all-time high for these companies. Almost all the three levers in the P&L account are working against these companies. In this quarter, there is an increase in number is companies that reported losses and it will not change anytime soon. Going ahead, earnings outlook continue to look very bleak for most of mid cap companies.

Q: In this environment do you expect to see more PE re-rating on the way up above even higher than 15 times or where the market is trading today?

A: PE re-rating cannot happen unless growth picks up. In the last year rally, we commonly talked about 27 percent gain which happened post 27 percent fall that happened in the market in 2011. The market is also normalizing within that band. Also, in between, earnings of some large caps are also consistently growing up and their stocks are also moving up so the index has moved to 20,000 levels.     

But Sensex is just one index. The broader indexes are still much below than their previous peaks. They are indicative of how the broader earnings are panning out.

I don't see any re-rating in the market right now because the growth numbers continues to disappoint both at macro and corporate level. Until, we are confident that upgrade cycle will start for the market, re-rating will not take place. Both earnings acceleration and PE re-rating will move in tandem. 

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