BNP Paribas sees earnings downgrades; suggests safe bets

Even as India Inc prepares its performance card for the second quarter of FY14, Manishi Raychaudhuri of BNP Paribas Securities expects to see further downgrades in earnings estimates. These downgrades, he says, will mostly be in the consumer staples and PSU banking names.

"We see FY14 earnings growth getting cut from current 13-14 percent," he says. Overall, he expects market to remain weak in October with postponement of QE tapering offering only temporary relief. He says there a few "painful adjustments" still left in the market. "I think market will drift downward to realistic levels in the near-term," he told CNBC-TV18 in an interview. He has a year-end target for the Sensex at 17,000, expecting the market to trade in a 10-12 percent range for rest of the year. With this backdrop in mind, Raychaudhuri advises investors to buy IT, pharma and select private bank stocks. He feels there is still some scope for FIIs to increase weightage in IT. Meanwhile, he is cautious on banks with higher infrastructure and realty exposure. He is positive on HDFC Bank and ICICI Bank, but has reduced weight in Axis and IndusInd Bank.   In the auto space, Tata Motors remains his top pick, and NTPC and Power Grid from the power space. He advises staying away from GMR, Lanco and GVK for now. Also, he says now is not the right time to buy BHEL as the competition is still strong. Lastly, he expects Reliance Industries and Tata Steel to benefit from the rupee depreciation. Below is the edited transcript of Raychaudhuri’s interview with CNBC-TV18 Q: Things have been quite volatile, good days for the last three weeks then a couple of slow days for us but now how do you think the month of October will shape up, will it be as good as September or are you cautious? A: There are critical variables when we look at other earnings estimates. We are now entering another earnings season and I would expect some further downgrade in the earnings growth estimates that everyone has on the street. Our own estimates seem to be forecasting something like 13-14 percent earnings growth both for fiscal 2014 and 2015, but these numbers are unrealistic. Both the analysts and the investor community are possibly too complacent on even some of the so-called defensive sectors. I would think that even in consumer staples, which has been kind of a beacon of stability over the last few years, there would be some downgrades – it can be seen in consumer discretionaries and public sector banks. Therefore, I would think that the 13-14 percent number would possibly gradually get down to upper single digit. That is when the market would possibly be in a more realistic zone. So I would think the bias could turnout to be on the downside in the month of October. Q: One of the reasons why we got a reality check was because of that tapering talk and the money suddenly ebbing away, do you think we are in for another rout like that when tapering begins or is tapering a much juiced out story, will come in a very innocuous fashion with USD 5 billion or something and therefore it is not going to be that seismic event it was in July? A: Tapering has to happen at some point in time. What we have got with the last announcement by the Fed is a temporary reprieve. The good part is that this is now understood among the investing community at large and therefore the exuberance that has been created in the Southeast Asian markets and in India prior to that announcement in May that exuberance has not created right now. We saw a couple of days of upmove after the postponement announcements but there was a sense of reality right after that and the so called risky markets corrected after that. So, the investor community also understands that the fundamental issues in these markets in terms of a high current account deficit (CAD), monetary and fiscal profligacy over last several years and these issues are not yet behind us. There is several months possibly even a few years of painful adjustment that many of these economies have to go through. Until and unless that happens, investors would not be rushing back into these so called risky markets. _PAGEBREAK_ In fact, I would think the danger is that if tapering of quantitative easing (QE) gets postponed even further then the extent of tapering that the Fed would have to do may be accelerated from what was envisaged earlier. It is perhaps better even for the US authorities to start tapering sometime by end of this year or early next year. Our house forecast is that it would start sometime in Q1 of 2014 with an initial tranche of USD 15 billion reduction from this current level of USD 85 billion that is being pumped in. Initially it would come down from USD 85 billion to USD 70 billion and gradually by the end of 2014 or early 2015 it would be wound up entirely. Q: Do you believe that this market is headed lower; do you think the bottom is not in place at those August lows of around 5,100-5,200? A: The Indian market has been trading in a very narrow range. For the whole of this year, in fact right from around October-November last year, it has been trading in a 10-12 percent range and for the time being that range possibly would be adhered to. On the Sensex it could be somewhere between 17,500 and 18,000 on the lower end. We have a target of about 17,000 by the end of this year. If we do have a combination of earnings estimates coming down and the market drifting down to the lower end of the range that it has marked out for itself then obviously that would provide a better platform for long-term investors to jump into the Indian equity market. Q: Are you buying nothing at all at this juncture since your logic is that we are going to get more attractive levels and probably for a sustained period? A: Many investors don’t have that luxury. There are India dedicated investors. Even leaving aside the domestic investors who are obviously India dedicated, even outside India you have quite a few India funds. Even emerging market or Asia ex-Japan funds have to allocate some portion of their inflows to India. Inflows have been ready to come by offlate by the way. But as a consequence of this, there is a certain core allocation that remains in India and we are advocating that at the present point of time, capital preservation should be the key. One should focus on the hiding places that India provides; unfortunately India provides quite a few of these hiding places. These hiding places are in exporters, in the foreign currency earners and in the relative defensives even within the high beta sectors. You have some private sector banks, which have proved to be resilient. That is the universe that we are talking about. IT services, pharmaceuticals, a couple of auto and engineering names and possibly some of the private sector banks very selectively.