Telecom, cement, cap goods to outperform : UBS

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Manishi Raychaudhuri , Executive Director of UBS Securities is overweight on IT Services and feels that Infosys and TCS numbers are in line with expectations. He feels that billing rates may improve as rupee appreciation is on last leg.

Raychaudhuri expects telecom; cement, capital goods and engineering sectors to outperform whereas automobile, oil companies could report negative earnings growth.

Excerpts from CNBC-TV18's exclusive interview with Manishi Raychaudhuri:

Q: How did you factor in technology performance and what was your key overweight?

A: In case of tech, we were expecting growth to be in the mid 20's. The earnings growth reported by a couple of the big guys are not too different from that. We have an overweight on IT services and despite the fact that these companies are getting hurt by the rupee appreciation, we have maintained our stance. There are two reasons for that - one, the fundamental strength in the business remains quite intact and we believe that billing rates of the large cap companies could go up over the next two quarters.

Two, as far as rupee appreciation is concerned, we believe it's on the last leg. As I had already said before, our forecast for the rupee by the end of this year is 40, and we have possibly seen the worst of rupee appreciation already.

Q: What have you made of Q1 earnings so far? Do you think the earnings performance will justify a 15,000 plus level for the market?

A: As far as this quarter is concerned, we have a consolidated earnings forecast for the entire stock universe that we cover, of close to 18-19% YoY growth and similar topline growth.

We believe, there are certain sectors likely to outperform, particularly telecommunications , cement , engineering , capital goods and construction . Cement may see superlative growth in the range of 30-40%, maybe 40-50% for engineering companies and 70-80% for telecom stocks.

Other sectors likely to drag down the average could be automobiles , where some stocks could actually report negative earnings growth. Even oil and gas and possibly IT service companies could be somewhere in between. That is as far as our quarterly earnings forecast is concerned.

For FY08, our earnings growth forecast has gone up significantly over the last 4-5 months. Earlier, we were talking about 18-20% range, but now our latest estimates indicate we are forecasting about 23% earnings growth in FY08, something in the range of around 17-18% in FY09. So, when we started off this year, in Jan 2007, the Sensex EPS forecast was Rs 821 and now it has gone up to Rs 860, that is an significant increase of about 4-5%.

On the whole, we remain bullish on the market. We have a target of 15,000, which the market has already breached, but we must also keep in mind that 15,000 was arrived at the beginning of this year, when we were factoring-in the old forecast.

Q: You are concerned about the auto sector in these earnings, but you have been increasing your weights on the rate sensitives. What is your call on banks and the auto space from a long-term perspective?

A: In our latest model portfolio reshuffling, we have increased our weight on automobiles and even partly on the banks.

Our call here is that we have seen the worst of interest rate increases. We may have a few more CRR hikes, because the Central Bank is now using the CRR as a means of sterilisation. But as far as lending rates and deposit rates are concerned, we have possibly seen the worst. We factored that in, when we increased our weights on banks and autos.

We tend to divide autos into investment autos and consumptions autos. We believe, the investment autos such as commercial vehicles and tractors are likely to be relatively less affected by the interest rate pressures, than the consumption autos, which are purely discretionary purchases.

So our weight in portfolios is also concentrated more on commercial vehicles, tractors, utility vehicles than on passenger cars and two-wheelers.

Over the long term, auto space is likely to be driven by the consumption cycle boom, which is precipitated by increasing penetration of financing and increasing affluence of the population, as well as by the investment boom. This investment boom theme also plays very strongly in our portfolio allocation.

Q: Do you also like the capex related stories, particularly from the metal space -  Tata Steel and Maharashtra Seamless ?

A: We believe the capex cycle plays, be it in engineering, construction, capital goods, metals or cement, are likely to do securely well over the next three years. Even though some of them have run up quite strongly in the recent past, the earnings estimate could continue to rise for them. Therefore, the valuations looking relatively unattractive today, may appear slightly cheaper going forward. So most of our overweights are concentrated in these capex cycle plays.

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