Religare's FY14 outlook: Earnings growth, 10-15% mkt upside

Tirthankar Patnaik, Religare Capital Markets, says that Tirthankar Patnaik, Religare Capital Markets, says that he expects higher earning growth in FY14 compared to FY13. Historically, December has been the best month for the market.

Also read: Moody's says India's rating outlook stable Below is the edited transcript of his interview to CNBC-TV18. Q: Does the currency stymy our chances of any great revival in terms of performance in December, as we are now close to almost 56?
A: Despite reforms we have been fairly conservative on the currency and our concerns have started after external account and current account activity. We expect second quarter current account deficit to be near 5 percent, compared to 3.9 percent that was in the first quarter. Many Street analysts were expecting numbers to improve in the year going forward and that is where I think the dissonance has been.
We are still concerned about the currency. Inaction on reforms front is adding to the pain. There is limited expectation from the legislation that is tabled for the winter session. One cannot expect big bang reforms or announcements by the government to come in.
If the government goes ahead with direct cash transfers, and want to make it fully implemented by end of 2014, that sound comes with noble intentions but it would also coincide with the election calendar. This is a concern for the markets so the currency remains a big overhang for the market going forward. Q: No business has yet been transacted and still there is no clarity on how retail FDI will pan out? How do you think the winter session will pan out with respect to FDI bills being passed and the impact that will have on the market?
A: Unless the government is sure of getting the bills or FDI in multi-brand retail passed through the Parliament they will not put it on board. They are likely to look for consensus. Along with discussion on FDI in multi-brand retail the rest of the menu for the winter session also looks pretty staid. Apart from FDI in insurance, Banking Laws Amendment Bill and the Companies Bill most of the other bills are not likely to create any big impact on the market.
The market has already factored the upside from FDI in insurance, FDI in pension. If the governments do not act on earlier announcement then the market will be disappointed. For us, currency remains a big indicator towards the end of the year. Q: The government has finally moved on divestment. Do you think Rs 30,000 crore is doable?

A: Unlikely. We estimated around Rs 15,000-20,000 crore for this year. They started on a good wicket. Hindustan Copper has seen through, but they have started fairly late in the year. So unless they gear up their act it would be fairly difficult for them to reach Rs 30,000 crore target. I think the fiscal number will remain around 5.8 percent.
  Q: You mentioned that earnings have likely bottomed out and things will improve on the earnings front in FY13. Last quarter, many sectors like capital goods or PSU banks disappointed. Which sectors do you think the earnings have bottomed out and they are the ones which are likely to lead the recovery, sectorially?
 
A: From a top down perspective, we expect the fourth quarter to do better compare to the third quarter. Earnings in the third quarter are likely to remain in the late single digits or early double digits. I expect 11-12 percent earnings for the October to December quarter.
 
Going forward, IT should have a better quarter. FMCG will continue to have a good run in terms of earnings. Earnings from cement sector are not likely to see big upside as seen in this quarter. It will be a mixed picture with sectorially divergent views. Overall, fourth quarter should see between 13-15 percent growth which should take the overall figure for FY13 at around 9-10 percent. Going forward, purely because of the fourth quarter improvement in the macro we should see better numbers.
 
Q: What is your view on the big move on Maruti and M&M?
 
A: We like M&M as a story. We believe it from a two-year picture, both from its tractor divisions and SUV. There has been dip in sales in last some quarters and we saw some worst of the pain. Rabi season is likely to be better than Kharif season. There was delayed rainfall and that affected agri incomes.  We expect the tractors' division to do better and we push M&M overall from an SUV angle in terms of a market perspective. Margin expectations from Maruti will remain a problem for the market in coming quarters.  
 
The stock has done fairly well post labour unrest incident. In the last couple of quarters and every time the stock falls it comes back to pre-incident levels which indicates that there is good amount of investor interest in the story. Long term investors are still buying that stock, but given a choice between these two we would continually go for Mahindra and Mahindra at this point.
  Q: You have a positive view on media which is coming out of the woodwork after five years. Which leg of media do you like now?
 
A: We are pushing Zee, Sun TV and some broadcasters. We have seen a fair bit of run over the whole digitization news that has been doing and what has also happened is incidentally. Digitization Bill is also tabled in the Parliament. We are overall positive on media sector. We like cinema and broadcasters.
  Q: Any thoughts on ONGC, on the news of ONGC Videsh Ltd. (OVL) looking to buy about 8.4 percent stake in Kashagan oilfield?
 
A: Yes, it is definitely a positive. The news that upstream companies are likely to petition the Petroleum Ministry about reducing the upstream share of subsidies will also be positive for the sector. But between ONGC and Cairn. At this point we prefer Cairn .
  Q: Will you suggest investors to buy PSU banks if macro economy picks up in the Q4?
 
A: We are pushing PSU banks as a pack, wherein Union Bank has been our pick and other than that we have been fairly positive as a top pick on State Bank of India (SBI) for a longish period now.
 
So as a trading bet, near-term reaction on news continues to favour PSU banks given their cheap valuations and given the minimal expectations people have on asset quality even now with the macro unlikely to turn in a very meaningful way at least in the next two quarters and asset quality typically following it up with the two quarter lag. At this point we prefer PSU banks.