Raamdeo Agrawal of Motilal Oswal Securities says that corporate profit growth is on track and the Q2 results are better than expected.

According to Agarwal, the Sensex FY07 EPS is seen at Rs 700 and even at 13,000 levels, he believes that the Sensex will be at 18.5-19x FY07 EPS.

Speaking on midcaps, he says that as the gap between the largecap valuation and midcap valuation increases, it is natural that midcap stocks will take off.

Excerpts from CNBC-TV18's exclusive interview with Ramdeo Agarwal:

Q: We have gone through most of earnings season, how are you feeling now, do you think fundamentals can support or justify even slightly higher levels from here because markets are already at all time highs?
 
A: Yes, till date, we have an aggregate of 470-480 companies and the top line has grown about 30% there, which is much higher than our expectations. It is 3-4% higher than our expectations and the profit growth is also on track at about 34-35%. It is one of the most wonderful quarters that we have seen.

The current constraint on infrastructure could be a bottleneck for 8-9-10% growth. This will flow through in corporate profits at least in the December quarter till one sees some kind of budgetary changes in terms of lowering customs duty, etc.

So right now, corporate profit growth is looking good, inflation is under control, interest-discounting factor is well within control so it looks alright for even a higher move of the market from present levels.

Q: How do you game valuations from here and have you had reasons to upgrade the full year Sensex earnings forecast, which you were working with earlier?

A: We had upgraded it by 6% just before the start of earnings season and now we are standing at about Rs 680-685 and so we can round it up to Rs 700. For FY07 March we are looking at Rs 700 EPS for the Sensex and that even at 13,000 levels would give about less than 20 times or more like 18.5-19 times FY07 EPS.

It is not very low, but with a RoE of about 23-24%, I don’t think the valuations are stretched unless there is any visible threat to corporate profits.

Q: What sense do you get after looking at the universe of midcaps that you cover and generally speaking, do you think midcaps are ready to play catch up now?

A: I don’t know when people will start focussing on midcaps again, but the midcaps, which have had a good corporate performance in this quarter would definitely get traction sooner than later.

There are quite a few midcaps, which have done very well in this quarter’s results. So as the gap between the largecap valuation and midcaps increases I think that it is natural that midcap stocks will take off. My sense is that we have reached that turning point in the midcap rally.

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