Giving his perspective on the second quarter results, Vikas Khemani of Edelweiss Securities believes the earnings season has been positive so far. Although, there was a huge concern over the banking sector before the results, sentiments have been particularly positive for this space.
Giving his perspective on the second quarter results, Vikas Khemani of Edelweiss Securities believes the earnings season has been positive so far. Although, there was a huge concern over the banking sector before the results, sentiments have been particularly positive for this space. He is also happy with the IT sector results. Going ahead, he does not see any major downgrades at the moment.
Here is the edited transcript of the interview on CNBC-TV18.
Q: What have the earnings season so far meant to you? Are you getting a sense that at least downgrades are over?
A: Earnings season so far has been reasonably positive. If you look at the banking sector, especially after the results of private banks were declared they have seen some amount of positive sentiment getting created. You have seen stable to improving margin outlook, no incremental slippages on the asset quality and I think liabilities also seem to be improving in most of the cases.
By and large banking sector has been fairly positive despite the concerns. That sector was being watched very carefully. Although it has been positive so far, we still need to see how it does in the PSU side. Will we see incremental slippages on that? I think that will be critical to watch out for.
Broadly, it seems the direction we are heading to is fine. IT results were also more or less positive. The outlook was positive. The results have created a good sentiment and I don't see major disappointments coming through for the rest of the season.
Q: I want to know whether you have stopped downgrading, up until the last six quarters almost everyday you heard of a brokerage bringing down their EPS forecast for the Sensex or for their group of companies. Have you started the process of upgrading earnings at all for the market or for some companies?
A: Upgrade cycle starts with a lag, I would tend to think. But, I would believe that the downgrade cycles have stopped. Analysts are feeling more positive about the earnings outlook going forward. Given the macro environment, given the guidance provided by the companies, I think things are looking positive.
I think for sure the downgrade cycles have stopped and going forward, we will have to see if the macro environment benefits the ground level. We will also see an upgrade cycle, maybe from the next quarter earnings season. If we see interest rate cut cycles beginning, that will also have an impact on the next quarterly earnings.
Q: Wanted to ask you about Hero MotoCorp and how exactly did you read the earnings for Hero MotoCorp, would it be a good time to accumulate at these levels?
A: I think Hero MotoCorp is facing challenges from the entry of Honda and you see volume growth was quite disappointing and they would be facing good amount of challenges. Currently, we have reduced our rating on this stock and our overall view on the domestic two-wheeler market is also slightly conservative or muted.
We think that probably you will see lot more competition coming in the segment and margins are more or less at the peak. We are also seeing some of the companies' tax breaks going away. You will probably see muted earnings growth and some more market disruption playing out going forward. And valuations are also not greatly cheap. Currently, we have reduced the rating on Hero Honda and Bajaj Auto. Our view is slightly muted on two-wheeler auto companies.
Q: If there is one sector that has done very well, whether it is cable, DTH or exhibition, the entire lot of companies have done well. Would you be a buyer in that space?
A: Absolutely. We have been positive on media and entertainment sector for sometime and we continue to remain so because this is a structural story. Iis also directly linked to the increase in disposable income of the consumer and digitalization and regulatory changes have also accelerated that.
We are a believer in that and also if the macro environment starts picking up, GDP growth starts picking up, advertisement revenues will also grow reasonably well. Two broad revenues, advertisement as well subscription are set for a good future and it creates a positive momentum for the whole sector. We think it is likely to continue for some time and you can also look at them as a structural three-five year story as well.
Q: One of the surprises that we saw this time from the earnings season was from the real estate space, something like a Peninsula Land which is up for the third day in a row and even Oberoi Realty came out with a good set of numbers, what is your take on real estate and any stocks that you would recommend?
A: I wouldn’t comment on stocks and I think real estate again is a very stock specific sector. Some of the companies which are over leveraged will not be appointing great results. The names you mentioned are companies without too much of leverage and any pick up in the sales will reflect in their earnings.
Oberoi is a great company, they have reported good numbers not only in this quarters, but also in the recent previous quarters as well. There are real estate companies which are different from the rest of the pack and they are not very over leveraged but, have been reporting great numbers over the last few quarters. Real estate is a very different animal.
We need to differentiate between companies. By and large I think interest rates coming down will have a positive sentiment on the sector and real estate also needs to be looked at from a city specific play because localised players will do better than the pan India or widespread players.
Q: Three brief questions, are you in buy mode? Are you buying Nifty companies or are you buying midcaps and if it is Nifty, which would be the flag bearer for the next six months?
A: Definitely, one has to be in a buy mode given that we have a positive view on the market. We think if the interest rate cycle starts playing out, we are in for a good upmove and the sense we are getting is that government is serious about carrying out few things and getting the growth back on track.
Given that, we have to be positive on the markets and we are positive on the markets. Amongst the Nifty sectors, banking will be the flag bearer because I think most of the things are playing out for banking, in terms of interest rates going down and asset quality concerns reducing. All these things will play very well for the banking sector.
When Axis Bank's results came out, one of the biggest concern on the bank was on its asset quality. The moment they reported reasonably good asset quality numbers, the stock did very well. As the concerns around asset quality reduces, you will see banking stocks doing well and interest rates coming down and auguring well for the sector. In our opinion, that sector will do very well in the market in the next 6-8 months assuming that interest rate cuts start happening in the next policy or the policy after that.
According to me, there are lots of midcap ideas which are right now available in markets. They are not very expensive, but are good quality companies. So far given the overall macro environment, investors were not looking at those stocks and sectors. According to me, since easy liquidity is there and investors are searching for newer ideas, not expensive ideas, you will see even midcap stocks doing very well.
Again one has to be stock specific. But, I truly believe that even midcaps will do well and you might have a possibility that midcaps will outperform broader indices in the next 6-8 months as we see easy liquidity and markets doing very well.