See 14-15% CAGR in earnings for 2 years: Deutsche Equities

In an interview to CNBC-TV18, Abhay Laijawala, head of research, Deutsche Equities India hails the Government's move to hike the diesel prices by 51 paisa per litre.  

Laijawala says the move is one of the "boldest piece of economic reform". "This is something that investors, the markets, were all clamoring for and against all skepticism the government has delivered," he says.
Laijawala expects the earnings CAGR to grow at 14-15% for the next two years. He says, "if the government can creat an enabling environment for the  So, if the government as a result of its pragmatic policy action is able to create an enabling environment for the macro economy and the return of the private sector, then we think that earnings growth will come back.

On the oil and gas sector, Laijawala opines, "We think that under-recoveries are likely to come off and the sector will continue to react to many of these statements. So, our oil and gas analyst is extremely confident. Infact, on the back of that confidence, we have raised the oil and gas sector as an overweight." Below is the edited transcript of Laijawala's interview. Q: What have you made of the fuel price changes last night?
A: It is a positive move. Infact, we believe that this is by far the boldest piece of economic reform. This is something that investors, the markets, were all clamoring for and against all skepticism the government has delivered. So, we see that the government is beginning to accept the Kelkar Committee recommendations. Infact, yesterday’s decision has therefore raised expectations that there could be more to come in-line with the Kelkar Committee recommendations.

Q: The Deutsche Bank (DB) note says that you actually prefer faces like Oil and Natural Gas Corporation Limited (ONGC) and Oil India (OIL). However, there is a school of thought that believes that because the government hasn’t been so categorical about diesel price increases, they may actually choose to increase the subsidy burden for some of these upstream companies as oppose to shouldering it themselves. How would you play the entire sector given your view on these changes?
A: Effectively, we would like to give the government the benefit of doubt, because we think that all the decisions that are coming out of Delhi are going to be far more pragmatic than what we have seen over the last couple of years. Therefore, with that overriding view, we believe that the surprises are likely to be positive. I agree that the market is likely to take cognizance of the positivity only in the next couple of months once you see a series of price hikes.
Clearly, therefore, we think that under-recoveries are likely to come off and the sector will continue to react to many of these statements. So, our oil and gas analyst Harshad Katkar is extremely confident. Infact on the back of that confidence, we have raised the oil and gas sector as an overweight. It is the first time we have had that sector as an overweight in our model portfolio. Q: Where do you stand on the front-line information technology (IT) space now after what you have heard from most of the large companies this quarter?
A: Once again it is pretty positive. It is going to be a good year for IT companies. The guidance was very good. The environment is improving and IT has always been a play on the global recovery. So, our IT analyst has been actually turning very positive on the outlook for the IT sector. Coupled with expectations of the rupee depreciation and the global recovery, we expect the IT sector to continue outperforming. So, we are infact overweight on the sector.

Q: What are you hearing from your clients on the liquidity front? The last few weeks have been terrific for India in terms of attracting flows. Do you expect that to continue?
A: We do. Infact, our sense is that the combination of rising policy certainty coupled with the return of economic growth in China, creates a perfect environment for equities. We have already seen that the first week of the year has seen a record USD 7.6 billion of flows into emerging markets (EMs). All my conversations with overseas investors leads one to believe that this is just a beginning and atleast for the next two or three months, we should be seeing very strong liquidity into all EMs.
We have already seen India get a lion share of flows. We have seen close to USD 2.1 billion since January. India has pretty much outperformed the rest of Asia. Korea and Taiwan being the other key markets. So, we think that that trend will continue.

Q: You have a Sensex target of 22,500, but some critics point out that earnings growth is probably not going to be that special this year. How do you respond to that argument? Are you tweaking that 22,500 target at all?
A: As far as earnings go- the basic thesis of our overall strategy is that the return of government action will set the pace for an economic and capex recovery towards the second half of the year.
Over the last two years, there was virtually no government. That is what started the vicious cycle. So, if the government as a result of its pragmatic policy action is able to create an enabling environment for the macro economy and the return of the private sector, then we think that earnings growth will come back.
At this point in time, our analysts are forecasting a 14-15 percent compounded average growth for the next two years. So, our target is premised on that growth. If the government creates an enabling environment, we will see the street embark on an earnings revision cycle probably by the middle of the current year.

Q: There is some buying sporadically in metal. How would you approach that commodity? How do you read the kind of data trends we have got coming especially from a key market like China?
A: We see it as very positive. Once again, the commodity equities will react to expectations of improving global growth and most importantly, a cyclical adjustment in China. This morning itself we have seen some very positive data flow from China. The Chinese gross domestic product (GDP) numbers come in at 7.9 percent, ahead of expectations, fixed asset investment growth coming at about 20.6 percent. So, it is again pretty positive.
In addition, we are seeing rising global risk appetite, which is also very positive for metal equities. We think that for the next couple of months, as we see an adjustment in terms of economic growth, it will bode well for metals equities. The whole of last year metals equities under-performed primarily because there was so much uncertainty over China and world economic growth.
Our global team, infact expects global economic growth to rise at about 3.4 percent in the current year led by China at about 8 percent and a return of trend growth in China and all EMs growing at more than 6 percent.