Energy, consumer space to do well in Q1: Motilal Oswal AMC

He doesn’t see any major surprises from the earnings season. “The Sensex EPS is going to grow by something like 10-12%. On a market-wide basis you are going to see a very strong top line growth and infact all the sectors are going to see very strong topline growth to the north of 20%. Energy, consumer space will do well in Q1.”

Also Read: 3 reasons why banks will disappoint this earnings

Below is the verbatim transcript of his interview with Latha Venkatesh and Anuj Singhal of CNBC-TV18. Also watch the accompanying video.

Q: Do you cover SKS Microfinance at Motilal Oswal? What have you made of this 20% rally?

A: We officially don’t cover SKS Microfinance but, the guidelines which have come in from RBI that the MFI industry is going to be regulated by them - is going to be positive for the sector as a whole.

We understand that credit growth or loan growth for the MFI sector has come to a standstill particularly in the state of Andhra Pradesh. From that point of view - whether loan growth picks up and to what extent - things are quite hazy.

But at valuations of 2.5 times book, maybe they are better than banks where you can buy them, reasonable and same valuations rather than going for a sector. But yes, sentimentally things are positive for this space given regulations which have come.

Q: We are coming back to that traditional resistance level of 5,700. Traditional as in - at least in the last 12 months it has been the strong resistance. What is your guess at this point in time? There is enough momentum for it to go past that this time around or is it just entirely an FII game so you just have to watch how much money is coming?

A: As of now it is more of a fund flow game. But incrementally, I believe markets have discounted most of the negatives that are known to the markets - be it interest rates, inflation. The additional positive from the markets point of view is the oil sector reforms. So it’s basically a change in FII view on the back of oil sector reforms. Expectations that more of that is to come is leading to some degree of inflows into the country.

Whether that’s going to continue or not - will depend a lot on how first quarter results shape up and what's the outlook on and what's the incremental reforms that going to come through. But at this point in time even the short term looks positive. In all probability, if 18-19% sort of a PAT growth comes in for FY12 then there is further upside to the markets even from these levels.

Q: It’s quite interesting that we are in a market where we are seeing big gains for high beta stocks, at the same time stocks like Hindustan Unilever or so called defensives are also making new lifetime highs. How do you explain that phenomenon?

A: The market is totally skewed where a bunch of stocks are trading at very lofty valuations of 30 prices to earnings multiples on a current year basis and above. Whereas there are another segment of the market which is trading at really distressed valuations. So both of them have to correct.

There will be some profit taking which will happen in the high prices to earnings multiple particularly in the case of FMCG companies. These businesses are good businesses but the fact that near term valuations are quite stretched. On the other hand things are quite bad for infra, real estate and many of the construction etc stocks. But given that the outlook is going to change once inflation comes off so it’s a trade off.

But coming specifically on Hindustan Lever - the volume growth has been quite positive. It is for us to see and markets to see whether margins growth or picks up on the back of the volume growth. Because we understand that they have quite a few levers in terms of economies of scale and purchasing of the raw material cost or advertisement expenses as a percentage of the total revenues. So hopefully, margins should also be better going forward.

In any case if the things were to continue like this then we should be expecting something like a 15-17% sort of a bottomline growth when we move into FY13 for Hindustan Lever. So, on one hand it is playing a catch up with the rest of the FMCG valuations, on the other there are incremental positives as far as the company’s activities are concerned. That is translating into higher multiples for Hindustan Lever as well.

Q: You referred to this factor - the upcoming results which could decide which way the market will go and to what extent. What are you working with for the Q1 results in terms of say a Sensex EPS or your own basket of stocks in terms of EPS growth and would you tank up on something before the results?

A: The Sensex EPS is going to grow by something like 10-12%. On a market-wide basis you are going to see a very strong top line growth and in fact all the sectors are going to see very strong topline growth to the north of 20%.

But the pressure is going to come at the EBITDA level in terms of margins - so you are going to see 16-17% sort of EBITDA growth. At the PAT level because of interest cost you are going to see 10-12%.

But, in terms of where the maximum growth is going to come from - it is basically coming from the oil and gas space, energy space particularly as a whole. The consumer space is expected to do well, the bottom line growth actually tracking the top line growth and the EBITDA growth.

So, from a markets and earnings point of view - there is not going to be any major surprises. But from a portfolio positioning point of view, we pretty much remain balanced in terms of allocations to the BFSI (Banking, Financial Services and Insurance) space, the consumer space where we are leaning towards at this point in time.

At the same time because of valuations - we are also making some few allocations to the infrastructure, construction names. Not to expect that anything very dramatic is going to happen in the short term but things could really improve maybe six to nine months down the line. So, we are positioning our portfolio from that point of view as well.

Q: Two stocks which have been really pillars of strength of market over last few months or so have been Bharti and L&T. Do you expect earnings to support this kind of rally that the stocks have seen?

A: For Bharti there is not going to be any major surprises in terms of quarter on quarter earnings. It is going to see something like Rs 1,400-1,450 crore sort of profit. But, it is more to do with what the RPM and traffic growth would look like.

If that is healthy then maybe current valuations are definitely going to hold up. If there is further deterioration and we don’t expect this but in case there is further deterioration in RPM then maybe you could see some profit taking.

L&T on the other hand may see some profit taking because valuations definitely are not very cheap at Rs 1,800 and things are tough for the power sector, the infrastructure space.

So post the results if there is further margin compression and based on a year on year basis and increased interest cost and there is some implication of that to the ROE as a whole then maybe you could see some profit taking in the case of L&T.