See 18000 on Sensex by yr-end; 8% earnings growth: Religare

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Tirthankar Patnaik of Religare Capital Markets sees Sensex reach 18,000 by the year end, but expects only 8% earnings growth. "For the Sensex EPS, we are looking at about Rs 1120 for FY12 and FY13 we are looking at about Rs 1250," he added.

With this in mind, Patniak bets on Mahindra & Mahindra and State Bank of India. "We are looking at 39% growth in FY13 for SBI," he said. It is the IT sector that is on his negative list, but within that he is positive on Wipro.

Going forward, Religare sees the Indian economy grow at 6.4% in FY12 and 7.1% in FY13.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: What is the Religare year end target for the market and what are you underlying that with in terms of earnings expectations?

A: We have a Sensex target of 18,000 for the end of the year where we are looking at earnings growth of about 8% for the rest of FY12 and 12% for FY13. This is at a discount to the consensus numbers where we believe that the rupee depreciation over the last quarter or so is something that analysts will start accounting in their numbers beginning the third quarter. So if you look at the Sensex EPS, we are looking at about Rs 1120 for FY12 and FY13 we are looking at about Rs 1250.

From a valuation perspective, from this EPS, we are taking a 20% discount to the long term average. The Sensex has traded at roughly 16 times over the last 20 years and we are looking at 13 times for our target. We believe that given the current slowdown in the economy, where we are expecting 6.4% for FY12 and a marginal pickup to 7.1% in FY13, there is no reason for the market to rerate just yet. So 13 times multiple should give us about 18,000.

Q: State Bank of India is one of your big picks this year. Walk us through the argument there.

A: Most negatives on SBI in terms of asset quality have been known to the market for sometime. SBI is a highly liquid stock and what is key now is what happens with asset quality. Our numbers are different from the street in terms of asset quality. We believe that beginning third quarter, we should see lower numbers in terms of slippages coming through. So our numbers are about 70 billion versus the streets 80 billion and above.

Going forward, what that would translate into is lower provisions and therefore we are looking at about 39% growth for FY13 which is built again on top of about 40% for FY12. So that's essentially the core argument, everything else is pretty much known.

Q: From the autos you have picked M&M ? That was a consensus favorite for a lot of people till last year and only off late people have started getting a bit cautious on that name?

A: The core argument for M&M has been the rural economy; rural growth has been strong. There is conflicting news about what is happening in the rural sector. What we see in our own dealer check is that sales are going through and there are no inventories building up at the dealer levels. From a core rural growth perspective, while there might be a temporary breather, we don't believe that core drivers of the rural economy in terms of a fiscal push, in terms of transferring capital to the rural regions of the country has slowed down at all. So I don't think anything but a temporary breather is in the line.

Specifically let us take tractors. The tractor business is one business where the street also has had concerns. After 30% over five years, people are rightly expecting slowdown. While the management has been guiding a double digit growth there, our numbers build in about a single digit 5% going forward. So despite all that, we have a target price of Rs 950 so we remain positive on the stock.

Q: From the midcap space, Cummin s is one of your top picks this year?

A: Cummins is a stock where one should get in at this point. There is nothing fundamentally wrong with the company, it's essentially a macro slowdown. What we should understand for Cummins is that it is a stock which is in a very high entry barrier business; it's in the high horse power generator side. It has about 70% market share and it contributes to about 40% to Cummins top line. If you include other businesses like the services business, you have 60-65% of Cummins business which is not really at risk in a slowdown. Of course we will see growth tapering off in the near term, but this is a stock one should keep from a long term perspective.

The major competition in this business is only from one player which is Caterpillar. Everything else, low horse power and medium horse power businesses is something which has low margins and that is not where Cummins' major power is. This is a stock one should keep for it's market dominance and extensive distribution network which will ensure that the business remains for many years to come.

Q: Your top pick from IT is Wipro with a target of Rs 475 which is quite a bit of an upside from where it's trading at right now. Is that a dark horse call for you?

A: We have been positive on Wipro from almost Rs 350 levels and the stock has gone up. Right now we are not very positive on the IT sector as a whole going into third quarter and fourth quarter because this is traditionally a weak season for IT, but things will start moving up again in the second half of the year.

What one should see for Wipro is that if you see their top five or top 10 clients, some sort of improvement has happened. The revenue penetration there has increased. We believe the company, especially the management, has increased data mining in those critical elements where we believe that it should translate into the valuation. The discount versus Infosys, which is at around 10% now, should narrow. So amongst the IT space, Wipro is one where we think management and their increased focus on their top clients should stand in good state. So on a relative basis, we will prefer Wipro.

Q: From the financial space you like PFC ?

A: We were negative for PFC since March-April of last year. We all know why State Electricity Board losses have been one major overhang on these monoline businesses. But what one should see is if it all in the price now and how news actually impacts the stock. The stock is at a juncture where there are no incremental negatives and the market is searching for positive news. We believe that from business perspective, tariff hikes by Rajasthan, Tamil Nadu and other states should stand in good stand at least for current cash levels or cash losses. We believe cash losses should comedown in FY12 and should fall further going forward. If you look at the Shunglu Committee recommendations, nothing new there; all has been said in the Electricity Act earlier. But if at this point they have taken much more faith and things happen on that front, we should see an improvement.

So PFC is something which should give you a 10-12% pop. This is one stock we will be positive on. If we are looking at an easing interest rate scenario, and we are building up about a 100 basis points rate cut by the end of this fiscal, PFC is one business of course which should as a whole sale funded business we should benefit.