ONGC, OIL may get re-rated; bet on Idea: Rajgharia

Market expectations from fourth quarter earnings were low, but barring a few names like Infosys and Reliance Industries, the performance broadly has been reasonably good, believes Rajat Rajgharia of Motilal Oswal Securities.

“The growth rates have been between 8-11 percent in terms of profits. There are companies, which have seen an upgrade after what they reported. But some of the commodity earnings and likes of ONGC may pull down these growth rates from 8-10 percent to a lower single digit kind of a number,” he said in an interview to CNBC-TV18. Consumers stocks like Asian Paints reported earnings below estimates, prompting earnings downgrade, he added.  Meanwhile, the traffic growth reported by telecom companies was ahead of analyst estimates, which is a positive for the sector. He expects Idea Cellular to do fairly well going forward; the stock has seen upgrades and is likely to get more upgrades in days to come. Also read: India may outperform; like capital goods, banks: JP Morgan Most public sector banks reported high slippages in this quarter and issues relating to asset quality are likely to remain going ahead, he said. He expects oil marketing companies like ONGC and Oil India to get re-rated going ahaed. “The problem relating to diesel under-recoveries has been handled to a large extent now; the undercovery is down to Rs 2.5/lite from 15-17/litre. Moving to direct transfer of cash scheme will prevent leakages as far as LPG supply is concerned. These stocks are also likely to benefit from fall in oil prices to USD 100/barrel,” he explained.  Below is the verbatim transcript of his interview on CNBC-TV18 Q: We are almost through with the earnings season. What have you made of it so far and how is it looking on upgrades versus downgrades? A: When we started this earnings season, we started on very low estimates because people had cut down their numbers meaningfully. We actually started the quarter with a pretty bad note where both - Infosys and Reliance disappointed the markets. Since then, the entire earnings progression has been reasonably good. The numbers whether we look at our aggregates or Sensex or Nifty, more or less, the growth rates have been between 8-11 percent in terms of profits. However, some of the commodity earnings etc like ONGC etc which will come now, will pull down these growth rates from 8-10 percent to lower single digit number. From point of view of breadth of the earnings, this time we have seen reasonably good number of companies meeting or beating the estimates. There are several cases where earnings have actually seen an upgrade after what they have reported. So, the investors should be quite okay with the way earnings have got reported till now on an aggregate basis and for the broader markets also. Q: There is some concern though around this entire consumer space as also the kind of numbers, stocks like Asian Paints reported last week. What have you guys made of the consumer earnings and have you had any specific or significant downgrades there? A: Talking about Asian Paints - While we had downgraded the stock about couple of months back, we will downgrade our number again significantly this quarter. Surprisingly, some of these stocks are just not reacting to any kind of negative news whether it is the super expensive valuations or big earning misses that some of them are reporting. The lack of alternate options in the broader market is so huge for investors, or the flow of the money, is so concentrated that these stocks in the worst of the times just become flat and on any good news, they just get a spurt. Many of the consumer names that we have seen this quarter have seen misses versus our estimates be it Godrej Consumers, Asian Paints, etc. Surprisingly, none of these stocks reacted negatively to their numbers. Q: For the first time in many quarters, people are also positive on telecom as a space. You track stocks like Bharti Airtel in some detail. What have you made of the numbers trend for telecom? A: This is one space, which we had upgraded just about couple of quarters back because we had started believing that there are enough indications in the system which is making things difficult outside the top four-five players. We had fair bit of interactions with all the managements post the reported numbers. This quarter, traffic growth was a positive surprise contrary to street expectations. One of the key reasons is because a lot of the traffic has started to slowly move from the newer set of players, to the big set of players in the industry. This is one process, which will continue over the next many quarters. It is important to note is that the revenue per minute (RPM) of each stronger player is almost 1.5-2 times RPM of the newer players. This means when traffic moves from the new player to an old player, the revenue that it is driving is more than 2 times. Idea Cellular a stock will do fairly well because we have seen good upgrades happening after this quarter and this process will continue over the coming quarters. We have seen whenever market sees stocks or sectors getting into an upgrade cycle, valuations at the beginning of the cycle should not matter because you have to ride through the cycle well. This is the first quarter where Idea has seen a reasonably good upgrade and Bharti did not see any downgrades. Since this process will continue over the coming quarters, stay invested. Idea being the pure player will benefit and Bharti also will do fairly well in the space. _PAGEBREAK_ Q: What about public sector banks, which has been the other area of disappointment? A: Somehow, the divergence in performance between public sector banks and private sector banks, not in terms of the stock prices, but in terms of how the slow economic growth has been impacting your asset quality, is really surprising. This quarter as well, we saw most of the public sector banks reporting pretty high slippages whether be it at the non performing asset (NPA) level or at the restructured book level. Guidances by most of them still indicate that it would be the same for more one or two quarters. As we have now seen growth now firmly coming closer to five percent and there is effectively zero transmission of monetary easing into the system, this is hurting more and more borrowers who are finding it difficult to service the loans that they have taken from the public sector banks. Maybe, the private sector banks have been too smart to diversify their books into large retail and some of the better quality corporates because of which they are not seeing any impact. However, the public sector banks will have at least one or two quarters more of pain. We will need a fair bit of transmission the cut in the interest rates into the system, for this process to stop. Till the time it doesn’t happen, the pain will continue for these banks. Q: How would you approach some of these oil and gas names because they have fairly high representation on the index. What are your top-picks there? A: Somewhere in this entire environment of pessimism or uncertainty - this one big reform is somewhere getting missed out. For the last seven-eight years, every year when we do our global road shows, investors have been worried about this oil subsidy. Rating agencies have been worried about this oil subsidy. The central bank has been worried about this oil subsidy. This problem of last six-seven years seems to have been firmly handled now in the last five months. The diesel under recovery which had reached almost a peak of Rs 15-17 is now down to Rs 2.50. This Rs 2.50. is basically either another USD 5 of oil price cut or another three-four rounds of diesel price increases. So this big problem is now over. On the LPG, once we move to the direct transfer of cash, hopefully that would also prevent leakages. So, from under recovery which used to be Rs 1.5-2 lakh crore, we are talking about a number which could well stabilise between Rs 50,000-60,000 crore which would almost be negligible when you look at the overall size of the gross domestic product (GDP). ONGC, Oil India, some of these companies which have been sadly bearing the brunt of this entire under recovery, can see a massive re-rating even from here. They have seen outperformance in the market over the last six months but their absolute return has still not provided any big return for people over the last many years. I think that return is in the pipeline as oil stabilises at USD 100. These stocks will earn so much of cash that the dividend yields even at today’s prices could well be closer to four percent for them. If gas price hike happens, there is some added catalyst. Amongst the oil marketing companies, I think BPCL is something which becomes a combination of both improvement in their balance sheet because of the lower losses on the domestic side, and continued upgrade that you would see on their exploration and production (E&P) exploration on the offshore side. So that’s a stock which has been outperforming and will continue. This entire energy pack which over the last five-six years has been a big under performer to the market looks set to regain some part of leadership over the years to come.