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Jan 05, 2017, 07.09 PM | Source: CNBC-TV18

See 20% earnings growth led by financials in FY18: DSP BlackRock

While FY17 earnings growth will be impacted due to demonetisation exercise, we expect a 20 percent growth in FY18 on account of mean reversion in financials and global cyclicals, said Anup Maheshwari, Vice President and Head of Equities & Strategy at DSP BlackRock.

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See 20% earnings growth led by financials in FY18: DSP BlackRock

While FY17 earnings growth will be impacted due to demonetisation exercise, we expect a 20 percent growth in FY18 on account of mean reversion in financials and global cyclicals, said Anup Maheshwari, Vice President and Head of Equities & Strategy at DSP BlackRock.

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Anup Maheshwari (more)

EVP & Head Equities & Corporate Strategy, DSP BlackRock |

Latha: Just to carry the interest rate cut point forward, the mean reversion part setting aside, do you think there can be actual growth in consumption? Yes, we are all questioning the nature and the extent of the rate cut but it could still kick off or push up consumption you think? There is low inflation as well there is a seminal cut in rates, can we bank on a very big growth in consumption in 2017?

A: I am not sure there will be very big growth, but I think it will start coming back. Again, there is no denying the long term consumption theme at the end of the day. So, there are some very clear structural trends that are visible which are very nebulous in the short run though because of all that is going around us. However, the fact is, it is a matter of time before these come back.

However, there are leads and lags; I don’t think a rate cut like this will immediately result in much higher consumption. I think it will take some time, but there is no denying that it is a great long term theme. So, maybe not in 2017, but over the next three years, we will definitely see consumption doing a lot better.

Sonia: Would you be concerned about the tax announcements that come in the Budget especially with respect to the Central Board of Direct Taxes (CBDT) clarifications on foreign portfolio investors (FPIs) getting double taxation or even the possibility of the short-term capital gains tax, a holding period being increased from one to three years. Would that concern foreign investors?

A: I don’t think the short-term capital gains tax would concern foreign investors. It shouldn’t concern domestic investors as well beyond a point. If they change the timeframe of short-term capital gains from one to two years or three years, I think that is par for the course. We have, compared to most of the markets, a fairly liberal tax regime as far as equity capital markets are concerned. So, that is something that you just take in your stride.

I think the other aspect, the indirect taxation that they have talked about, that is definitely very retrograde, we think and it is clearly going against what the government has been indicating so far. It is very complex almost impossible to implement so it came as quite a shock for any foreign investor coming in and I hope they resolve this issue sooner than later.

Anuj: One view is that this year could be about companies which have good assets but the balance sheet has been broken and they could give good reward as far as the bottom up stock picking is concerned. Would you agree with that view?

A: There is clearly a global shift away from expensive high quality names into more value oriented names that has being happening over the last six to nine months. It is quite possible when the shifts occur that they will last for some period of time. However, it is very bottom up, frankly. There is no one answer to give you but the value style we think will do a lot of better this year.

You got to look at companies that are able to deliver some degree of earnings growth at the same time, so there could be value but they should have some earnings capability out of that asset. Just asset liquidation alone, I think goes more towards helping bankers than shareholders. The shareholders are always looking at the earnings power of the assets and wherever there is earning growth and value I think that will be a good spot to look for companies.

Latha: You have spoken a lot about value buys and about mean reversion. Give us a number what is your earnings growth for the current year where has it fallen from and what is your earnings growth for FY18?

A: For the current year, we are almost sort of through, so we are not sort of focused on the earnings growth number this year because the last couple of quarters have also disrupted things a lot. So, we are not even trying to really predict the quarter numbers of December and March beyond a point because we are assuming that it will be a lot of trends that are short-term and not necessarily reflective of the long-term earnings potential of these companies. I would rather just talk more on FY18.

As far as FY18 is concerned, currently, we are looking at about 20 percent earnings growth and that is predicated largely on mean reversion in financials. So, the assumption is that we will not have further bad loan challenges and to some extent it depends also on global cyclical.

The nine companies in the Sensex that I mentioned, which will pretty much drive 70 percent of earnings of this 20 percent growth next year, it becomes very important that they mean revert as we expect them to. So, what will take away from this 20 percent number is if this thesis doesn’t play out, but as of now that is what we are going with.

Sonia: You spoke about global cyclical, so wanted your view on some of these auto companies that have a global exposure names like Tata Motors, Bharat Forge, Motherson Sumi Systems, those market have been picking up pace. Do you see more value here?

A: Yes, we do. If you look at our portfolios, we are quite overweight on Tata Motors, for instances. It is part improvement generally overseas but it also again becomes little more stock specific. In autos particularly, you have to focus a lot on new model introductions and how the pipeline looks over the next couple of years. Therefore, from that stand point Tata Motors is showing a fairly strong cyclical potential in earnings change over the next two years relative to what they have shown before. So, you will see some element of that in the auto component as well.

Latha: What are the nine gems of yours?

A: These are largely the banks, its Axis Bank, HDFC Bank, ICICI Bank, State Bank of India (SBI), a lot of them mean reverting coupled with couple of the steady names ITC, Mahindra & Mahindra (M&M), Tata Motors, Tata Consultancy Services (TCS) and the Tata Steel. These are sort of eight or nine of the names.

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