Macquarie sees downgrades galore post Q2 nos; likes telecom

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Macquarie sees downgrades galore post Q2 nos; likes telecom

Looking at the results season so far, Rakesh Arora, head of research – India at Macquarie Capital Securities tells CNBC-TV18 that he expects to see a 5-6% cut in consensus estimates.

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Looking at the results season so far, Rakesh Arora, head of research - India at Macquarie Capital Securities tells CNBC-TV18 that he expects to see a 5-6% cut in consensus estimate. "We haven't really looked at the cumulative numbers, but my feeling is that cost pressures were evident," he said, adding that there is a possibility of some downgrades coming through.

However, Arora is positive on the telecom sector and expects to see upgrades post Q2 results. His top pick in the sector is Bharti due to good valuations, he explains. He is also overweight on pharma and consumer discretionary.

On the flip side, he cautions investors to stay away from the steel sector. "Expect BHEL also to continue outperforming," he said.

Going forward, he believes investors will remain cautious and continue to pick defensives. "Selling on rallies remains the right approach," he adds.

Below is an edited transcript of his interview with Sonia Shenoy and Latha Venkatesh. Also watch the accompanying video.

Q: What did you make of ONGC's earnings and how are you placed on this stock now?

A: We have an outperform rating on ONGC . Obviously results were better than what we expected and the stock has also been behaving that way. The government is possibly preparing it for an FPO.

Q: Looking at the results season so far, has it lived up to expectations or do you expect to see some downgrades coming in as the season ends?

A: I think it's been a mixed bag as of now. We haven't really looked at the cumulative numbers, but my feeling is that cost pressures were evident. When we built our forecast, analysts were assuming flat margins and a repeat of what we saw in the first quarter which was a 100 bps margin contraction.

So I think there would be some downgrades coming through. I think the consensus estimate should move down by 5-6% from where it was before the results, that's what we were expecting.

Q: For the macro markets itself, do you think the bad news is kind of priced and that 4,700-4,800 is definitely the bottom given the kind of earnings that have come out?

A: Yes, one can say that. We are seeing lot of markets rebound and people are hopeful that some resolution will happen in Euro. So the slower growth environment in developed market is one of the base case thesis. There are some signs of China starting to get over the peak and start loosening its policy. There are clear signs in India also that interest rates have peaked out. So some investors are getting excited and we are seeing some follow through buying coming through, with the hope that the worst is behind us. But I would like to caution that it's difficult to see any major positive catalyst out there and I think the market will be stuck in a trading range for pretty long time.

Remember that all this tightening which we are seeing in the last few months will come across and weaken data in the next few months. So there would be hardly any support in terms of better data coming out from the economy and therefore the markets have little upside. Fundamentally, I would still think that selling on rallies and staying defensive is still the call.

Q: Among the midcap space, which are the stocks that stood out for you in terms of results performance?

A: Well most of the midcaps actually went other way in the sense that they were disappointing. In FMCG, we had results coming out for Emami and Marico and clearly there were pressures on the margins. I think pharma companies did slightly better in terms of what we were expecting and where they delivered. Banks too were a mix set of results. So I can't really pinpoint any one stock which really came out pretty strongly in these results as yet. It was majorly at the mark or below the mark for most of these guys.

Q: Anything in the capital goods space that interested you? How would you look at the big boys Larsen and BHEL at this juncture? Would you worry that the capex cycle is going to continue to be an overhang on these stocks or are you beginning to nibble at them?

A: We have an underweight position on capital goods and I think we will continue with that kind of a position. Largely what we are seeing is that a lot of companies have embarked on short duration capex cycles given the uncertainty. So this is helping some of the companies like Thermax , Siemens and others who are into those small projects.

But large scale projects are not coming through. The only position that we have among the large caps is Larsen and Toubro because we believe that's a premier company and would be able to gain orders. BHEL has huge competition coming up from power equipments and even that sector is looking under a lot of stress due to the lack of availability of coal and lack of purchasing power from State Electricity Boards. So I think BHEL will continue to struggle for some more time. So L&T is the only pick we have from there.

Read on to find out the sectors Macquarie is underweight on..