Find out: FMCG, pharma, Oil& Gas who will lead Q4 earnings?

The fourth quarter earnings will begin from Friday. In an interview to CNBC-TV18, Varatharajan Sivasankaran of ICICI Securities outlined his expectations from stocks across various sectors. 

He sees profits of ONGC and Oil India declining both on a quarter on quarter and year on year basis. He is fairly positive on Reliance Industries earnings and expects the company to post a profit of Rs 5,500 crore in Q4. Meanwhile, FMCG pack may witness slower growth with better margins. He is bullish on Dabur. The IT sector may see revenue growth with lower margins, he added. From the midcaps, Havells, Bajaj Corp and Mahindra Holidays are likely to register strong earnings. Sun Pharma remains his top pick from the pharma space. Also read: Expect RIL Q4 profits to be flat: Edelweiss Below is the verbatim transcript of his interview to CNBC-TV18 Q: In Q4, which stocks and sectors are you expecting a downgrade and is it already priced into the individual stock price? A: In terms of expectation of numbers barring FMCG and technology, there aren’t really many sectors which are going to seriously show profit growth. In terms of downgrade potential, of course there are quite a few like banking, looking at PSU banks, probably are likely to witness serious asset quality issues. So, there could be significant downgrades there. Definitely, there are more possibilities in space like autos and few other sectors as well. So, there is quite a bit of possibility in terms of downgraded estimates on those sectors. Q: I have your overall average numbers. Your report says revenue and EBITDA growth are likely to be at 4.5 percent and 4 percent - that’s revenue growth at 4.5 percent, EBITDA growth at 4 percent year-on-year (YoY). But earnings will be a 2.1 percent decline. That’s the average that I get from your report. Where will be the sharp YoY declines sectorally?

A: Overall, one is the interest component, which is going to be definitely high and in quite a few places there are one offs as well. So, below EBITDA, there are adjustments which are leading to that downgrade. If one looks at specific examples, one which comes to my mind is Tata Motors which had below the line last time kind of adjustment for JLR. So, there are similar companies which are there which have adjustments and write backs. Q: With this minus 2.1 percent earnings decline, what will the Sensex EPS look like at the end of the results?

A: We track Nifty. If one really looks at it YoY FY13 versus FY12, I would think this kind of numbers which are expected to pan out, we could be looking at anywhere between 1-1.5 percent kind of FY13 estimates, growth cut vis-à-vis FY12. So, that would be the reduction in growth what we would be looking at. Q: For FY14, what’s your expectation of Sensex EPS?

A: Once again I will talk about Nifty. The consensus estimates are looking at 15 percent kind of a growth, I am sure it is not going to be too very different with Sensex, maybe slightly higher. So, we are looking at consensus numbers of 15 percent EPS growth for FY14 versus FY13, similar kind of growth in FY15. The key question is that the analysts have not downgraded their estimates to account for the surcharge, which was proposed in the Budget so that is one factor which will lead to a bit of a cut. Apart from it, the downgrade cycle continues. So to that extent, 15 percent looks very aggressive. I would be potentially looking at a number of in and around 10 percent - that should be more like a benchmark to look at. If I look at the market broadly, I don’t think the market today is definitely discounting a 15 percent growth in FY14. To that extent we should adjust it down. _PAGEBREAK_ So in our view, broadly it is looking at a 10 percent growth. Even then, what we claim is that the market could be in a zone, which we could call below long term averages. So what I would call as a cheap zone. Q: There are some interesting other statements that you make. You are expecting good results from some midcap companies. Can you tell us where the pleasant surprises could be?

A: We hardly cover two-three special midcaps other than the regular sector related midcaps. So, obviously we have stocks like Havells, Bajaj Corp and Mahindra Holidays, across the board. One will look at relatively strong numbers for all of them. Q: Can you tell us specifically which stocks you think are already overpriced in both FMCG and pharma sectors?

A: In FMCG, if one looks at Hindustan Unilever (HUL) for example, obviously the consumption space growth is slowing down. So, at current prices we are fairly negative on HUL. If one looks at ITC, we are fairly positive on it, we have a structural story there. Nevertheless consumption slowdown will definitely affect ITC as well. But nevertheless, vis-à-vis where we are in terms of the stock price and the earnings growth, I am quite comfortable with ITC. Among the large ones, those are the two where it is quite clear in terms of opposite directions.

Other than that, if you look at the other FMCG stocks, we are fairly positive on Dabur. We are still looking at the consumption story hitting them as well but not to the extent of Hindustan Lever. As such, we are fairly comfortable with stock pricing. So to that extent we are positive on Dabur.

The other space you were referring to was pharma. Once again, Sun Pharma has been our top pick. We continue to remain positive on it because the earnings growth momentum has justified itself. We do believe going forward as well this will continue. So to that extent, we are quite positive on Sun Pharma. Q: The market is perhaps expecting oil and gas to be the sector of the year. What’s your sense on how oil and gas stocks like Reliance, GAIL, ONGC, etc are expected to do in FY14 and also Q4?

A: Let’s take Q4 first. The big delta we are looking at is one in the case of upstream companies. Obviously, we expect kind of an adjustment in the sharing ratio. So, till nine months, like we have been seeing a 36 percent kind of a sharing upstream which is likely to move up. Usually, the adjustment happens in the fourth quarter. So we are potentially looking at a close to 40 percent kind of a number. Hence, ONGC and Oil India are likely to report a YoY as well as QoQ drop in profits. That is something which is going to affect the Nifty estimates. However, if we take aggregate for our coverage, obviously that is going to be made up by BPCL and HPCL because that adjustment is going to flow through entirely in the fourth quarter. Till the first nine months they are at a loss. That adjustment will set off its lower profit in upstream. If one looks at Nifty, obviously that adjustment does not flow through because it is just BPCL there with a lower weightage vis-à-vis ONGC. Reliance on the fourth quarter number, we are fairly positive. I think the consensus is very close at 5500 and looking at a gross refining margin (GRM) of USD 10 so I think there, not much of a surprise is expected. Q: You called the Nifty in cheap zone. Which would be the constituents that you are recommending buys? A: We are fairly positive on the private sector banks and specific to oil, we are quite overweight on that, IT we are quite positive. Like you mentioned in FMCG, ITC is one of the standout stocks for us. Largely, in this area, if one looks at the other stocks which have underperformed in the recent past, I think periods on uncertainty, I would not be averse to look at stocks like NTPC, Power Grid Corporation of India Limited (PGCIL). Coal India definitely is in a zone where one should look at it. These are the stocks in the largecap space we would be fairly positive on.