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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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 |

Experts at DSP BlackRock Investment Managers are betting on mean reversion in financials segment to spur earnings growth. 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.

Earnings growth will be concentrated around 9 players, Axis Bank, HDFC Bank, ICICI Bank, State Bank of India, ITC, M&M, and Tata Steel which will contribute about 70 percent to the 20 percent overall earnings growth in FY18, Maheshwari told CNBC-TV18.

In FY18 banks, which have undertaken a lot of risk, are likely to return to profitable levels seen two years ago, Maheshwari told CNBC-TV18.   

The market entering a safe zone as the macro situation is tricky, he said. Goods and Service Tax and Union Budget will serve as next macro triggers, he added.

Maheshwari is bullish on pharma and energy sectors, but advised investors to avoid consumer discretionary and industrial capital goods sectors.

Going ahead, Maheshwari said, the conflict between domestic and foreign flows likely to continue in short term, adding that he is hopeful of strong domestic flows from retail investors in 2017. Foreign flows will ebb and flow and we hope not to see a large net outflow at the end of the year, he added.

Below is the verbatim transcript of Anup Maheshwari’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Anuj: 2016 was all about domestic investors staying put while we saw a lot of foreign institutional investors (FII) outflows. What is your sense about 2017, do you see an equally strong year as far as the domestic inflows are concerned and do you think that will support the market?

A: We are definitely hopefully are strong domestic inflows. I think this conflict between foreign flows and domestic flows could remain for little while but net-net we are very positive that there is a very structural change in domestic flows, both from institutions as well as retail investors. I think it is very clear that other options have been challenging. So, it becomes a bit of a circular effect, as the markets do well there is more flow that tends to follow. So, we are hoping that we are in that sort of a cycle for now.

As far as foreign flows are concerned, that will keep ebbing and flowing, but in the last 23 odd years that they have been investing in Indian markets, they have been positive in 20 or 21. So, our assumption is you won’t see by the end of the year a very large negative outflow or anything of the sort. However, in the short run, these flows are conflicting with each other.

Latha: As we step into 2017 you can actually make a negative case. We have been waiting for the second half of the year to give us better earnings for four years now, it has not happened, and now there are more worries that the demonetisation impact could last up until FY18, there are worries that a delayed goods and services tax (GST) will compound that problem and if the NDA were to not make a mark in UP that also would take away some of the political sheen of stability that India has been enjoying. This is the bare case, you agree or can you make a bull case?

A: The macros are looking difficult; there is no escaping that fact. When you have such changes in the economy which are sort of induced upon the economy, then obviously there will be some short term challenges that will come through. So, it is very clear that GST when it comes will cause some short term confusion just like demonetisation has.

However, at the end of the day, the macros are important up to a point but we are more focused on corporate earnings. From a corporate earnings perspective, while the short term obviously looks very unclear because of demonetisation, but as we look into next year, it is quite clear to us also that the base effect will start playing through. Now, you are absolutely right that this is not play through for the last four or five years, but we have reached a point where a lot of cleaning up in banks has happened.

We have actually calculated, if next year more or less assumptions are for about a 20 percent earnings growth, around 70 percent of that 20 percent earnings growth will probably come from about 30 percent of the stocks which is about nine stocks in the Sensex and most of them are banks just reverting back to normal profitability of two years ago and to some extent some global cyclicals like Tata Motors and Tata Steel.

So, just a mean reversion itself will give you a 20 percent growth in one of these years, whether it is 2018 or slips a bit into 2019, we are not sure, but it is coming. Therefore, as you spend more time in the market, the probability of the market going higher starts increasing as the earnings growth comes through.

Sonia: Let us talk about the Budget. We have started this new segment asking all our experts if they were Finance Minister for a day, what would they do. If you were Finance Minister on Budget day, what would you do to tackle demonetisation on one hand and to meet the fiscal deficit target on the other?

A: There is so much, it is not the most envious position to be in frankly, but I think a lot of people are looking forward obviously to some level of tax reform. That is pretty much now a given in terms of expectations. It is very clear that higher taxes aren’t pulling in the numbers; it is very evident. So, hopefully while we are doing a reform of the entire system including GST, we might as well do a reform of income taxes as well. So, we are hoping for that.

I think we would also like to see little more clarity on the whole disinvestment program because that is a big gap relative to what the government should have achieved. So, next year will be pretty important. They have already indicated that they are open to strategic disinvestments, so, that will be another important factor to look forward to. The rest of it is more just oriented around government spending and I don’t think there is a challenge with the ability to spend, the issue is executing that spending. I think that is the bigger challenge.

So, we would like to see how programs are put in place for the government to start spending more to kick start the economy. So, those are some of the aspects I think that will be important in the Budget and I guess the FM hopefully is focused.

Latha: Rephrase it for us, if I were a Finance Minister I would?

A: I would cut taxes; I would spend all the things that market would want to hear typically, but logically within the constraints of the Budget. So, it is quite commendable that they have stayed within the fiscal deficit, but we definitely need the government to actually exercise its view of less government in business and actually implement some more strategic disinvestments or just raise more money to support a lot of the spending that they are planning to do.

Anuj: Apart from the FII selling the other problem for this market has been that there has been no leadership. There were two leaders of the last bull market for six or seven months, banks and consumption, and we saw both of them suffering quite a bit. If we have a start of a new bull market in 2017 at some point, what do you think could assume leadership?

A: Banks would have to play a role because they are one fourth of the market. So, it is quite unlikely you will have a strong move without the banks being involved. So, that is clearly one area.

We are hoping that some of the smaller sectors also will participate. It has to be a more broad based type of move; it can’t be just one sector dominating in this scenario. So, we are quite bullish on the energy space, we are quite positive that pharmaceutical will recover at some point in time. So, there are certain sub sectors, they may not add up too much, these two together make up another 20 percent of the index, but my sense is it will be a little more bottom up and more broad based depending on where the earnings are coming through.

So, banks will have to be an integral part of any future rally that comes through just given their weight. It is still a long term good place to be; there are short term challenges, we didn’t clearly like what they have done in terms of rate cut recently. To our mind it didn’t really add up, but apart from the short term challenges eventually it is quite clear that banks are going to be an important part of the next rally as well.

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