IDFC Sec expects 15-16% earnings growth in FY12

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Experts believe that 2011 will be a tough year for the market with domestic concerns such as inflation and high interest rates hindering the growth of the economy. Moreover, dismal fourth quarter results posted by companies have become an additional concern for the market.

Speaking to CNBC-TV18, Nikhil Vora, managing director and co-head research at IDFC Securities, said that the market will not see any upside surprise on earnings quality; however, he expects 15-16% of earnings growth in FY12.

Vora feels that growth quality is getting extremely broad-based in FY12 and long-only funds are looking to reallocate money into the Indian market.

Talking about the sector-specific avenues, he said that he is bullish on consumption sector, while bearish on United Spirits and United Breweries .

Below is a verbatim transcript of Nikhil Vora's interview of with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What's your sense now? We had a bad May, will we bounce back in June or are fundamentals stacked against the market?

A: At this moment, the fundamentals are obviously not at the best ever. You have seen a fair bit of pain in the market and also on operations across the board. Earnings quality has not really surprised on the upside in the last few months and I don't see that surprising or changing drastically in the next quarter or so. Having said that, I think it's possibly the best time for institutional investors to start to take a re-look at the markets.

There is a time when one can really do a serious stock checking. As most of the event calendar gets peaked out, be it interest rates, inflation, inflows or international events as also in action from the government, I think if most of the variables tend to get peaked out in the next quarter or two, then you will actually see a very strong market momentum build up ahead.

So, it's a process where you might see fair bit of time, possibly a quarter or so, where markets don't really do too much. However, it is also a time when lot of long-only funds will start to take a re-look at quite a few stocks and businesses and possibly build positions. We are still looking at a comfortable 15-16% growth in earnings for FY12, which is not bad considering the macros that have been possibly at the worst ever.

Q: What's your beat - miss ratio look like and what are you comfortable holding right now in terms of an earnings performance from India in FY12?

A: It's interesting. The growth and earnings have been to the extent of around 22-23% for FY11. But in FY12, it's likely to get more traded to close to around 15-16% earnings growth. Having said that, I think the quality of growth is getting extremely broad based in FY12.

You are looking at earnings growth of anywhere from 5% to 25%. Not a single sectoral index is really leading me to a negative growth and not a single sectoral index is likely to grow over 30-35%. In FY12, you are looking at broad based earnings, which signal that as we look at the markets for the current year you will not possibly see any leadership emerging. So, you may not really see financials or infra consumption theme becoming predominant, as you has seen it historically. However, earnings cut has become extremely broad based which means that it's really time to do stock picking rather than do top down.

Q: How much more would you give to things like ITC and Unilever in terms of both their stock performance and for leading the market?

A: You just mentioned that everyone hates India right now. However, the good part about people hating India for a shorter time period is that the bar for the market really keeps getting shorter and shorter. So, effectively if the bar is getting lower, the expectations are really getting grounded out. Incrementally as we have seen it in India over the last 20 years if not more, you always have surprises both on policies or government decision making if that has been really the logjam. So, as we move forward, maybe there is lot more hope than actual feel on ground.

However, the fact is that I don't think you will be at a standstill for a prolonged period of time. Most investors do recognize this over a period that hedge funds may obviously play a trade but long-only funds are seriously re-looking at how to really get back their weights in the country and get back to weight allocation in particular stocks and so on. So, we might have some more prolonged agony in terms of market momentum but I don't think the markets are really sliding out. To that extent, there will be fair bit of interest, which should seem to get accelerated as we move forward.

On the consumption side, it's ironic and we have always been fairly bullish on the consumption as a space. The fact is that in a fair price zone, you have still seen a fair bit of outperformance from lead players. So, our big theme in the last six to nine months has been top tier consumption names vis-à-vis the second tier. So, you look at ITC, Levers, Nestle as the lead players vis-à-vis the Godrej , Marico , Dabur in the pure consumption players.

Second tiers have actually returned nothing in the last six to nine months whereas the top three names in the consumption space have done a 30% to 40% return on stocks. So, clearly the theme has played out and I still think that there is fair bit of visibility on growth in these companies and these names. So, I don't see that changing significantly. Obviously valuations, as also returns from these levels will get significantly moderated excluding ITC, where I still think there is fair bit of momentum left in the stock.

Amongst other consumption names, I have incrementally started to become fairly bearish on the liquor space in India. This is again a space where we have been structurally very bullish in the last five-six years. I have turned bearish on United Spirits more as a structural de-rate and turn bearish on United Breweries more on valuation concerns. So, these are two disparities that one is struggling with, while one is broadly bullish on consumption as a theme.

Q: Why is no one buying Zee? Results looked good for the current quarter. The balance sheet seems to be in good shape, the management is doing a buyback, nobody seems to be interested and the stock is languishing at Rs 130-140. What's the reason you think?

A: I think that in the media space you want to buy Delta . If you look at advertising or you look at distribution - these are two areas of Delta, if you want to buy Distribution - Delta, you maybe better off buying distribution assets per se or you might better off buying an IBN possibly where the Delta and Distribution can be disproportionate. If you are buying advertising growth, you would possibly not play the best advertising growth story through the number three players in that space.

So, to that extent I think lot of valuations are getting inbuilt into these businesses. Till the time being, we are not amongst the top two players in that space. I think valuations do tend to remain in a range and we think that Zee  will get into valuation range which can be draining.

As you look at new businesses evolved like you look at Dish TV for instance, in the distribution space Dish TV has done very well. Not yet the cable guys but my sense is that Dish has shown the way in terms of operational and stock delivery. The next level of growth could happen in the cable distribution. Then maybe into companies which have a direct impact and the non-linear impact of distribution and advertising which could be IBN or maybe Sun to a particular extent but IBN for sure. So, I would much rather play those players right now.

Q: Are you working with a year end target for the market at IDFC right now or do you just want to hold out on that level and see how earnings pan out?

A: Frankly it's always a moving target, we all tend to put up a target index and so I think the visibility of the businesses gives us comfort that these targets can get revised and revisited at every six months. In the next quarter or so, you might possibly see some amount of consolidation in the current range which is not bad at all. While it is fatiguing but I think it's a very good momentum build-up as you move forward.

As we get into the backend growth, my sense is that as interest rates stabilise and we are calling a peak out of interest rates in the next quarter or so, you will see a lot more private sector participation in capex which is not really happening in the recent past. It should lead to a momentum coming back in the second half of the current year, which should give fair bit of visibility to infra businesses, to financials per se and consumption is being doing quite good.

So, I think 21,000-22,000 index level is something which we would look out for by the end of the year and maybe revisit targets post that. I am just comforted by the fact that with all the variables which can be negative in India or globally present in India right now, we are not really looking at growth getting significantly diminished. So, 15-16% earnings growth in an environment like this is not bad at all.

Q: What have been your key downgrades at the end of this earning season which ends today? Last week there were a few disappointments like Tata Motors, DLF , SBI , BHEL , etc. Have you marked down earnings for the year for any of these large cap names which have reported in the last 10 days?

A: It has been, I think if earlier we were living with a Rs 1225 odd index level in FY12, we are now living with a Rs 1200 odd index level. So, there has been a couple of points downgrade in earning for most of the companies and clearly the fact that there has been no real material surprise yet on the upside. If look for Tata Motors for instance, I think it is a business which can essentially get derated as you move forward.

I am not so worried about the earnings visibility in Tata Motors for the next year or so, but the quality of earnings in the next 2-3 years and possibility of derating of that business is very much there as we move forward. Again in United Spirits, the issue is more about derating of that business, not so much about earnings downgrade, which I think is not a very positive thing because there are direct consumptions in India and we are extremely excited about them.


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