SENSEX NIFTY
Jan 23, 2013, 02.04 PM IST | Source: CNBC-TV18

PSUs, cyclicals next key in earnings run: Motilal Oswal

Rajat Rajgharia, head of research, Motilal Oswal Securities, says that post downgrade he is underweight on HUL. He is also of the view that ITC has always been a better option compared to HUL and he has a neutral on Dish TV.

Rajat Rajgharia, head of research, Motilal Oswal Securities, says that post downgrade he is underweight on HUL . He is also of the view that ITC has always been a better option compared to HUL and he has a neutral on Dish TV.

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

Q: What is your view on Hindustan Unilever (HUL) now?

A: After eight consecutive years of positive return till 2012; this year for the first time the stock has delivered negative returns. After downgrade, the earning estimate over next two years is about 7-8 percent on CAGR, 27-28 times earnings multiple will need to contract a little bit before investors look at it. Investors should be underweight on this stock.   

Q: Have you sliced either earnings or price targets on HUL and are you doing preference for ITC over HUL?

A: ITC has always been a preferred option compared to HUL. Since yesterday we reduced our estimate for HUL for both FY14 and 15 by 7-8 percent based on new royalty issue and also after 7-8 percent downgrade in the estimates. Our target price for HUL is Rs 450, which is 6-7 percent lower from yesterday's close.

Q: Just for the limited index, not for the broader market, would you say you have seen more hits than misses in terms of earnings and the index earnings may see a bit of an upgrade?

A: The index numbers till now has been 18-19 percent verses our estimate of 13 percent. Historically, it is seen that the first half of the earning season pans out well because private sector banks, technology companies, growing companies report their numbers and in the second half public sector undertaking (PSU), some of the more cyclical report their numbers and the earning numbers moderate but based on the first 20 days of numbers, the Sensex earnings per share (EPS) would see an upgrade but we need to watch out the heavyweights into the PSU and the cyclical.

Q: Do you cover Dish TV . It reacted sharply after weak set of numbers?

A: We have a neutral rating on the stock. The numbers also surprised us negatively because while we were expecting losses to come this quarter again. The type of cost escalation that came in, in this quarter was a negative surprise. In the entire media pack while the broadcasters have benefited significantly due to reform into the space, Dish TV on the other hand, also should be a beneficiary but it is still not able to translate that into the numbers. Dish TV needs to move to a profit after tax (PAT) breakeven number otherwise this stock will remain stuck in the range of Rs 70-80 for the time being.

Q: What would worry you the most about the second half of the earning season where you expect most of the disappointments to come in, would it be infrastructure, telecom, public sector banks, which tops the list of your worries?

A: Most importantly people will now watch out the slippage trends into the PSU banks because now PSU banks will start to report numbers and within 10-15 day gap almost 20-25 banks will report numbers. It would be an important trend to watch not just slippages but also what impact the slippages will have on banks margins.

 Second, many leverage balance sheet will start to report their numbers and December quarter will mark a new low both as far as operational profitability and net profits are concerned for these companies. Third, for some companies like Tata Steel where the headwinds are persisted quite long, there the numbers would look fairly disappointing from this quarter point of view.

Last, stock like Oil and Natural Gas Corporation ( ONGC ) need to be closely watched where the markets have been quite positive on the stock but somewhere the whole uncertainty about a possible change in the subsidy sharing keeps on becoming a hang on the stock.

Q: Are you bullish or cautious on Larsen and Toubro (L&T) which reports its numbers tomorrow?

A: Over the last one-one-and-a-half month L&T momentum has taken some breather. Going by the prolonged slowdown through 2012, we are now expecting even company like L&T to see some impact where there would be some moderation in the order intake.

It becomes very challenging for them to sustain the guidance that they have given and in this environment where, forget new projects but even existing projects in the book faces risk of cancellations as seen into the road space over the last one month. It is better to be bit cautious on L&T at least for this quarter. Before taking a fresh look on the stock we need to see the results, uptick, study the investment climate and the rate cycle.

Q How do you approach autos, numbers from the two-wheeler space have been disappointing and outperformers like M&M have been struggling through this month either in terms of market share issues or otherwise?

A: The two-wheelers segment will continue to face challenges in the short-term and when the domestic industry itself is facing shifts in market share from one play to another the sector multiple itself contracts, which we saw in the case of Hero MotoCorp. For Bajaj Auto , export at Rs 55 is helping them to cover up for the weak domestic performance but overall the sector is moving towards lower multiple.

In four-wheelers, Tata Motors fairly outperformed. It was the best performing Sensex name last year. Now, Maruti Suzuki is doing well and should continue that performance. Mahindra and Mahindra got impacted by some of these macro headwinds particularly relating to diesel price increases that happened.

M&M from a stock point of view, the big drive in the consolidated earnings over a three year period can almost double the numbers from FY12 to FY15. We look at an earning per share (EPS) of Rs 90-100 for FY15. The stock at Rs 880-900 is trading at a very attractive level and investors should accumulate this stock.

Q: There is quite a bit of media that reports today. What's your top pick from there?

A: In the media space we are positive on print media both DB Corp and Jagran . DB Corp's in their earnings and conference call also reiterated some up tick which is now coming onto the business front.

Secondly, print media prices globally will be quite stable and these are some good companies with strong balance sheets and payouts. Within the broadcasters, Zee and Sun both look good because the uptick in the business that will come to them over the next two-three years both on ad and subscription will be very significant and that will translate into big cash flows for both companies. We would advice people to remain invested in both these stocks.

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