Q4 earnings to fall; ONGC, Maruti top picks: Motilal Oswal

Fourth-quarter earnings may report a marginal fall in growth and are expected to be very disappointing, says Rajat Rajgarhia, head-research, Motilal Oswal Securities in an interview to CNBC-TV18.

The weak earnings have been partially factored in by market which is likely to remain range-bound till earnings recover.
Talking about stocks, Rajgarhia said investors in Titan were worried about tough KYC norms.  He believes ONGC's growth in earnings could rise by 35-50 percent between FY14- FY15 and two-wheelers are likely to underperform due to high competition. He advised investors to accumulate Maruti on declines. Below is the edited transcript of the analysis on CNBC-TV18 Q: Some of the advance tax data is beginning to trickle in. How do you expect the earnings season to pan out for Q4?
A: The initial data from most of the sectors for this quarter indicate that it is going to be really a tough period. I won’t be surprised of the growth in earnings for the quarter turn out to be flat or report some marginal fall in growth because a lot of sectors have seen new lows and growth in credit is not picking up. Q: In that context what do you expect the market to do? Do you expect more adjustment to disappointment in earnings?
A: After the December quarter earnings, the markets adjusted to some disappointment with a correction. But investors have actually delayed or postponed their expectations on a recovery in earnings. What was expected to happen in the first half of FY14 now seems to be getting delayed to the second half of FY14. So the markets will just remain stuck in a range and in turn the valuations will keep on correcting . Q: The oil and gas segment has been on a steady run of good news. There is talk again of another fuel price hike come the weekend. What is your outlook on this segment and what seems an interesting buy?
A: A fairly detailed report on PSU oil companies that we released revealed that after almost three-to-four years of no or little earnings growth stocks like Oil and Natural Gas Corporation (ONGC) and Oil India will suddenly see an adjustment in their earnings.
It is more of an adjustment rather than growth because the PSUs were earning much below than what they should have. ONGC earnings will adjust from a Rs 29-30 earnings per share (EPS) over the next two years to Rs 40-50 depending upon how far the fuel price hike occurs. The trend very clearly indicates a rise in earnings.
The adjustment will also occur as expectations of the increase in gas prices have started to get built into the estimates. So, it would be fair to assume that over the next two years ONGC's earnings could see a readjustment of 35-50 percent from what was reported in FY13 and that is why ONGC and Oil India are two of the best investment ideas in the market at this point of time. Q: The Repco IPO closes today and subscription has been thin so far. Would you recommend investors to buy?
A: We have always been very positive on the mortgage financing industry because it offers probably one of the best financing opportunities in this country. Repco operates in a niche segment of its own and after this infusion of capital, it leverage will suddenly drop from 8 times to closer to 4.5 times which will allow the company to increase their books comfortably over the next three-to-four years.
The underlying business opportunity is so huge in this segment that even a small participant can continue to grow for many years before worrying about the rate of growth. Q: What do you think of NALCO's offer-for-shares (OFS)?
A: The NALCO offer-for-shares, given the price at which it is being offered, will witness some subscription. For us, Hindalco still remains the best bet within the options available today. Q: What is your top pick from the auto sector?
A: There is a consensus that the two-wheeler segment will be witness more adverse impact before it starts to turn positive. Within the four-wheeler segment, Tata Motors is complete global play. The negative domestic earning is hardly making any impact on the stock. From a stock point of view, Maruti consolidating at levels of Rs 1,350-1,400 will become interesting, but there may not be a rush to buy the stock because the earnings may take some more time to recover. Q: What is your outlook on Titan Industries?
A: Titan is the favourite bet and industry across the regulatory framework to address the current account deficit (CAD). The changes in gold-import and know-your-customer (KYC) norms over the last three-to-four months have been too many in too short a period of time.
While industry will take its own time to comply, investors are worried about the initial adjustment period as the CAD levels continue to touch alarming levels. So till there is a dip in gold imports, I think the stocks will continue to remain soft. This period offers good entry opportunities into a stock like Titan which has corrected 25-30 percent and may correct another 5-10 percent to reach closer to the Rs 200 levels Q: What do you think of the Financial Technologies-MCX combine which has been under pressure?
A: There are a few reasons for this pressure. First, the optimism of some sections of investors after the MCX-SX launch is taking time build up and second, a lot of stock will enter MCX after the lock-in period gets over and that could be a fairly large supply. Third, the introduction of the Commodities Transaction Tax (CTT) in the Budget has not gone down too well with investors.
So suddenly the fundamental and technical views have started to come together to cause a very severe correction in the stock. We estimate that at current prices, MCX and Financial Technologies look very attractive. But investors will have to wait till this temporary pressure ends and the entire supply is absorbed into the stock.