Mkt sees 10% earnings growth YoY in largecaps: Antique

Shanbhag thinks that Chinese demand for specific metals have slowed down and that could be a concern for commodity prices. The valuations have corrected sharply in metal space even globally, he said. He sees pressure on margins for steel companies.

Here is a verbatim transcript of the exclusive interview with Krish Shanbhag on CNBC-TV18. Also watch the accompanying video.

Q: What are you expecting from this earnings season as it unfolds next week?

A: I don't think there are any significant surprises there. The market is expecting an earnings growth of about 10% year-on-year, or YoY, at least for largecap companies. It is in line with what we saw in the first quarter and we see similar trends going forward.

Q: The IT sector has been beaten up quite a bit, bleeding up to the numbers? Do you think the bad news, if any, is in the price already or could there be surprises?

A: There could be negative surprises on the operational front. But the way rupee is going, it should help IT companies going forward. So, I don't see any major confidence in the visibility of their businesses going forward. 

However, if you see valuations of these companies, they are at multi-year lows. So, while there is a problem on the business front, I don't think there is a significant problem with a long-term visibility of these businesses. Also, given the valuations, it doesn't make sense to sell these stocks at these levels. You would perhaps want to buy these stocks at these levels with a long-term view.

Q: Earlier, you had an investor interaction where you had quite a few infrastructure stocks as well. What are you expecting from the construction and infrastructure space in terms of earnings?

A: We had few construction companies coming for our Singapore Conference. However, we don't actively cover those companies, so we don't have readymade estimates. But from what we heard from the construction and infrastructure companies, they feel their order books are strong. They said they have growth in their order book. The companies believe that they have visibility for the next couple of years as far as earnings go. So, I don't see companies disappointing in earnings in the near-term, or for a quarter or two.

Q: From the whole oil and gas spectrum, what is your top pick in terms of earnings?

A: From the oil and gas space, we have covered two companies. We have buys on Reliance Industries and Reliance Petroleum. We don't cover marketing companies so far, but are very positive on the refining side. We believe that Reliance would see significant growth in its earnings essentially because of commissioning of Reliance Petroleum and its exploration business. We have buys on both of these companies with a FY10 view, where we think there would be significant addition to topline as well as bottomline because of these businesses. 

Q: What is your take on the metal space which has seen considerable erosion in stock price across the board whether it is ferrous or non-ferrous?

A: There has been a sharp correction in metal stocks and material prices themselves have corrected very sharply. If you look at the global metal space, valuations have corrected sharply. We have just recently released a report on steel sector where we have put a buy on Tata Steel and a sell on Steel Authority of India, or SAIL. Essentially, it is a valuation story of why we are putting a buy on Tata Steel and sell on SAIL. It is got to do with the increase in coking coal prices and perhaps the inability of SAIL to increases prices to offset cost benefit.

So, there is pressure on margins everywhere and we have seen prices being corrected globally for steel companies and that is why it is a situation where one needs to look at it quarter by quarter. We have also got some indication that Chinese demand for specific metals have slowed down and that could be a concern going forward for these commodities and stock prices.

Q: You don't track the stock in specific but do you have a recommendation on the rights that are opened for some of them Tata Motors, Hindalco, and Suzlon?

A: I don't have an opinion on that. But the prices of these stocks have corrected so much that right price may not be very attractive for some of these companies and investors, who are looking at a long-term horizon and would perhaps want to buy in these companies. But the margin of safety is so low and the volatility in some of these stocks is so high not only for these stocks but across the market as these stocks correct or move between 10-20% in a week. So, investors who have been holding on to these stocks would be edgy and perhaps take a call closer to the closing of these rights issue rather than the beginning of it, so it will be an individual choice. But investors are concerned given what is happening globally and the volatility which we have seen even in Indian markets.

Q: What about FMCG which has been a relative outperformer? How are you positioning yourself in that sector?

A: We have a sectoral buy on these companies. These are defensive plays but if you look at their earnings growth and valuations, the valuation is not cheap. But perhaps the market is discounting better visibility in earnings from some of these companies, which is difficult to say of many sectors. It is not the visibility but the valuations of some of the other sectors which could pose a concern. Whereas you are relatively sure that while there is visibility in FMCG companies, there is sustainability of that visibility over may be a longer-term compared to some of the other sectors. So yes, these are good investment opportunities in uncertain markets that we are currently in.