Unexciting earnings to have no impact on mkt: Motilal Oswal

With a few big names out of the way, the consensus on the street remains the same. Speaking to CNBC-TV18, Rajat Rajgarhia, head of research at Motilal Oswal Securities, says that this will be a quarter when earnings will really be unexciting to provide any catalyst to the market.

In fact, he believes valuations are now not going to be based on earnings. “I think the valuation call for the market is right now not based on earnings because the market has believed that the earning cycle is going to remain very soft,” he explained.

Based on the evidence coming in so far, Motilal Oswal had scaled down its forecast for FY13 Sensex EPS to 8-9%. “I am reasonably confident that now this revised number of 8-9% growth factors in a lot of moderation,” said Rajgarhia.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukehrjee.

Q: On the evidence of what has been coming in so far, any reason to believe that you need to scale down your FY13 Sensex EPS forecast from the already fairly cautious level that you are standing at?

A: We needed a realignment on some of the assumptions when we started making the numbers for this quarter, and I am reasonably confident that now this revised number of 8-9% growth factors in a lot of moderation.

But yes, the numbers that we have seen till now typically comes from most of the high growing sectors. For example, while we have seen some disappointment from Infosys, the year on year growth rates for both Infosys and TCS has been 30% plus. Even HDFC Bank has been 30% plus. But going forward, as more companies start reporting, this number is going to get moderated very significantly. So this will be a quarter when earnings will really be unexciting to provide any catalyst to the market.

Q: Is that your call for the end of the year as well, that the market will remain around these levels because of very little upside in terms of valuations?

A: I think the valuation call for the market is right now not based on earnings because the market has believed that the earning cycle is going to remain very soft. Over the last six months, almost 100% of the downgrade that we have seen in our earnings has come from the global commodities because we have seen a significant cut in most of the global commodity companies. The domestic businesses have somewhere still held on to their numbers which were already moderated. So valuation call in the market is more a function of non-earnings catalyst right now.

Earnings will have an impact on individual stocks. At an overall market, I think right now we are trading at about 13 times FY13, which is where we will hold on till the time you get any positive catalyst to move up.

Q: It’s no surprise that Infosys sold off post its earnings, but even TCS have started cracking despite what looked like a relatively good set of numbers. Do you hear a lot of pessimism from your clients?

A: Yes. There are two kinds of investors - one who have been invested in TCS and second who haven’t been. People who haven’t been form a larger proportion because TCS had a lower weightage for most of the benchmark funds. The weightage has just kept on rising over the last two years, and at this point of time, when the valuation divergence has become so high, it is a very brave call for anyone to reverse that stance.

Secondly, the most important thing that made people worried was the kind of pricing decline that we saw in Infosys this quarter. Infosys has been holding on to their pricing guidance where they were unwilling to compromise much, so if this is a kind of trend continues from Infosys, then people think that sector may be in for some more negative surprises. TCS may not be doing an absolute return, but the outperformance of TCS to the sector still remains pretty high.