Infosys may guide to 8-9% growth for FY14: Rajgarhia

The market is not so upbeat on India Inc's fourth quarter earnings of FY13 and Rajat Rajgarhia, head of research, Motilal Oswal Securities feels June quarter (Q1FY14) will not be any different from March either.

Major component of earnings are not seeing any pick up.  "Loan growth and auto volumes are still not picking up," he said in an interview to CNBC-TV18. Meanwhile, fourth quarter earnings season will kick off on Friday with IT giant Infosys announcing its numbers. Market will be closely watching their FY14 growth outlook, which is likely to be a big trigger for all IT stocks. He expects Infy to guide for 8-9% growth for FY14. "The other important thing investors would watch out for is whether they step up the dividend," he said in an interview to CNBC-TV18. Going ahead, the dollar revenue growth rate outlook for most IT stocks is likely to get better, he added. In the auto space, the broking firm expects Maruti’s margins to normalise at 9-9.5% in Q4 and sees a high probability of earnings upgrade for the stocks in FY14. Meanwhile, Tata Motors' domestic volumes will take time to recover, but the damage to the overall earnings will be very limited. Considering that Jaguar Land Rover (JLR) is still holding on very well and it is a very big proportion of the numbers, he explained. The stock is seen heading higher from the current levels. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Infosys starts off the earnings season tomorrow. What are your expectations?

A: This quarter should be quite okay for them considering that when they last came in January they had a pretty good confidence boosting guidance, which we saw into the stock also. The focus of the market will of course be now what guidance they spell out for FY14. Right now we are modeling in an organic growth guidance of 10 percent plus. Including Lodestone it would be closer to 12 percent. They may guide some 100-150 bps lower than this. They typically now guide for a minimum growth. They stopped giving a range. So, they probably speak out about a minimum growth of about 8-9 percent for this year. The other important thing to watch out in Infosys would be whether they step up the dividend. That is another thing that investors have been asking or looking into the company now. Q: What if IT generally does not have a great Q4 but points to the fact that things are recovering and FY14 will be much better. Will you need to change around expectations a great deal if you hear that kind of commentary?

A: If one looks at IT, just reflect back in FY13 itself, a first half earnings growth of about 30-35 percent and the second half earnings growth has been 13-15 percent. The first half had almost 18-20 percent positive kick coming from the rupee itself. Next year if one assumes rupee to be 54-55 range then at least that is no more a big driver of the growth for them. The dollar revenue growth of course is looking better for most of the companies. Somewhere that is getting priced into the stocks also. All these stocks have been big outperformers this calendar year, Infosys in particular. People have been positive on the stocks. The consensus itself has also been positive on the stocks. At the margin the dollar revenue growth rate outlook just seems to be getting better for them. Q: I see one of your other top overweights is Tata Motors and Maruti Suzuki from the auto space. They have had a miserable couple of months in terms of sales traction. What do you expect to see in this quarter in terms of numbers?

A: Speaking on Maruti this quarter you will see margins normalizing at about 9.5 percent for them in the March quarter. Considering the environment we are in. The volumes for Maruti in the March quarter could have been much worse than what they reported. With the kind of slowdown that we have seen on the consumption side, if they are still doing an average March quarter volume on a monthly basis, I would think that is a pretty good number for them to hold on.

From the next 12 months point of view suddenly many things seem to be working in favour of Maruti. 1) The petrol-diesel disparity is coming down. 2) Besides launch of Amaze the other part of the competition would be more stabilizing. 3) Interest rate commodity prices working in their favour. 4) We do not know what Yen to factor in in FY14, but if one looks at all the street numbers the estimates for FY14 is factoring in a much lower Yen than what it is now. So, the possibility of earnings upgrade in Maruti is very high.

On Tata Motors the standalone business continues to disappoint. Losses that they have been making for the last couple of quarters will continue for March and likely June also. However, Jaguar Land Rover (JLR) is still holding on very well. Even the retail volumes for the month of March at 53,000 plus, also gives a confidence that one is entering FY14 on a reasonably strong footing.

It will take time for the domestic volumes to recover, but the damage to the overall earnings is very limited considering that JLR is a very big proportion of the numbers. The stock again from the January highs of Rs 330-340 has corrected down to Rs 250-260. Now at sub 4 times EV to EBITDA, sub 8 times earnings this is a stock which one can bet to play good upside from here. Q: What do you think lies ahead with earnings in the first quarter? Q4 most people expect not to be special. Do you think in Q1 we will get concrete signs of a major turnaround in earnings or will that continue to lag and disappoint? A: This is more of a guess that I am making for Q1 right now, because I do not have concrete number. I do not think Q1 will see any recovery in the numbers for most of the companies. The major components of earnings are, 1) banks, we are not seeing any pick up in loan growth. That loan growth number may just see some contraction only because whatever working capital cycle was picking up because of high inflation, even that number will see some correction. 2) The autos volumes are still not picking up. They are just holding on where they are right now. in consumption the March quarter slowdown will continue into June. One must see some relief coming from companies like Reliance, Oil and Natural Gas Corporation (ONGC) or technology to some extent. Otherwise this March quarter we are expecting almost zero growth for our universe. At this point of time I am guessing that June quarter will not be any different from this. _PAGEBREAK_ Q: You mentioned Reliance Industries. Do you think Reliance will have a good first quarter? They report next week and this quarter is expected to be good, but refining margins are apparently under quite a bit of pressure of late. Do you think that might affect Q1 performance?

A: Yes, the refining margins have been very volatile and we have seen that in the December quarter itself. When refining margins generally were weak, Reliance was still able to report a fairly good premium over the benchmarks. This quarter also we are looking at Rs 5,500 crore kind of profit number. A number between Rs 5,000-5,500 crore is something, which is a combination of both refining and petchem. This is basically holding on for them. We see these refining margins changing month over month and we are just into the first 15 days of April. So, we just may see some reversal again sometime in this quarter. So, I am still not too much worried on the numbers. This range is something which should hold on for Reliance in the June quarter also. Q: Would one start reducing exposure or weightage to any of the consumer names given what we are hearing about volume growth slipping or do you think Fast Moving Consumer Goods (FMCG) is still one of the best bets?

A: In the same report that you are referring to we have cut down our weightage to consumer again significantly. That cut in the weightage is the result of cutting wait on ITC. This quarter numbers when we prepared for FY14 we had seen our estimates getting cut for both ITC and Hindustan Unilever (HUL). 1) Both the companies have seen an estimate cut of almost 300-400 bps on the growth front, that is one. 2) If one looks at the consumer pack, in FY14 the sector did an earnings growth of 19-20 percent versus index earnings growth of 5 percent. In FY14 one will see the index growth picking up from 5 percent to maybe more closer to 11-12 percent. The FMCG companies’ growth moderating from 19-20 percent to more closer to 14-15 percent. So, the big outperformance in the earnings growth in FY13 will moderate meaningfully in FY14 and that in itself will be a reason for the multiple premium of these companies over the index to moderate. Recently, we have also downgraded our rating on Asian Paints. As I mentioned we have cut our weightage on ITC. So, at least we do not see many of these stocks providing any absolute return over the next 12 months period and the rest of the market has fallen enough to provide absolute returns in some of the large caps. Q: Would you say by the end of earnings season there may have to be a bit more in terms of valuation contraction because of what we see in terms of the quality of earnings?

A: Technology, consumer and healthcare these three sectors put together as a percentage of overall market cap has risen from a ratio of almost 25 percent few years back to now about closer to 35 percent. On an average these three sectors trade at 20 PE FY14. So, we are saying that if the aggregate market is trading at 13.5 PE and one-third of the market is at 20 PE. Then two-third of the market is trading at about 9 PE or even lower than that and we are talking about the some of the big names right now. Sub-9 PE in a moderating cycle is anyways very attractive and somewhere the June quarter would really be the bottoming out quarter for many of these companies on their growth front with some easing or some improvement at the macro front. One should see things getting better. Valuations will bottom out a quarter before you start seeing earnings bottoming out for the companies. Q: One pocket that performed last quarter, but since then has seen a big drop in sales in the cement sector. How are you guys approaching that?

A: That has been a real surprise over the last three-four months. If one looks at till September quarter that sector earnings was growing at almost 25-30 percent. December quarter saw some decline and now March quarter will again report a decline in earnings for the companies. Somewhere it is a lagged impact of the kind of demand slowdown that we have been seeing in the system. Just about a couple of months back we downgraded Ambuja Cement because we thought that it needs to price in some of the slowdown factors, which have been cropping up. However, the correction in the stocks has somewhere become very, very severe. At some point of time over the next three months one would see investors start looking at this space again. Companies like ACC at about USD 90-95 EV/tonne, companies like Ultratech at about USD120-130 EV/tonne, Ambuja also in a similar band, they all will be trading at quite below their replacement cost. At least in the second half of this year with fair bit of election spending one should see some demand picking up. So, maybe a temporary period for cement. Valuation correction is more severe and good time this quarter for people to start picking up stocks again.