Rupee fall to impact Q1 earnings, invest in IT: Ajay Bodke

Ajay Bodke, Prabhudas Lilladher believes that the sharp fall in the domestic currency will take a toll on FY14 first quarter earnings. Keeping that in mind, he recommends investing in sectors like software, which would be clear beneficiaries of the fall in the currency.

He advocates having Infosys and Wipro in the portfolio with higher weightage and on the midcap IT side he advocates looking at NIIT Technologies. Pharmaceutical is another space where he seems positive.

The laggards in his opinion still continue to be the old economy sectors like power, infrastructure and capital goods.

Also read: Rupee may strengthen slightly against dollar: Arora

Below is the verbatim transcript of his interview to CNBC-TV18

Q: In a few days we will start talking about the Q1 results. What is in store you think after what we saw in Q4?

A: I think the sharp fall in the currency clearly will be the theme that will be driving the numbers for FY14’s first quarter. At the beginning of the month we had foreseen the turbulence and the skittishness that could envelope the markets because of concerns of announcement of tapering of bond purchases sooner than later.

Also the fact that trade deficit was expected to be higher than the month of April. We had expected around USD 17 billion, but it has surprised even us around USD 20 billion. So, from that perspective we would be looking at sectors like software which would be clear beneficiaries of the fall in the currency.

Infosys and Wipro were two stocks that we were advocating having in the portfolio with higher weightage. On the midcap IT side we were advocating looking at NIIT Technologies.

Pharmaceutical is another space where we have been positive. Also on the infrastructure side we feel that much expected increase in plan expenditure from Rs 4.2 to 5.2 lakh crore, which the government had budgeted should start reflecting in the aggregate demand numbers for some of the infrastructure companies.

However, that is a quarter and half away from now. So, we would broadly be looking at the numbers from private sector banks. This will continue to outperform the public sector banking space, IT and pharmaceuticals. Whereas the laggards in our opinion still continue to be the old economy sectors like power, infrastructure and capital goods.

Q: We understand the CCA could tick up the gas pricing issue tomorrow. How would you approach this entire energy space in that light and are you hopeful that there will be some resolution on that front?

A: We are very hopeful that a positive decision should come through and the companies like Reliance Industries would be clear beneficiaries of an increase in gas price. We have seen CCA being extremely proactive. USD 27 billion worth of long pending infrastructure projects have been cleared in the last few months, but they have long way to go. Around 256 projects with a total investment of around Rs 7.5 lakh crore have been waiting for environment clearances, forest clearances, land approvals.

So, the pie is pretty large but the pace at which the Cabinet Committee on Investment (CCI) has gone about clearing the projects in oil exploration and development, power sector, some of the pending projects in the road sector really give heart. In addition to the previous answer the fact that the finance minister has resolved that he will be looking at increasing plan expenditure by Rs 1 lakh crore in the current financial year over last financial year.

So, these projects take time, the gestation period will be around nine months. As we approach the fag end of the second half, one is clearly hoping that the investment led demand will show some signs of pickup. From a long-term perspective, investors need to start looking closely at company like Larsen and Toubro (L&T) which has its presence in across various sub sectors infrastructure or power or construction.

In our interaction we believe that out of total Rs 5 lakh crore of projects, which are expected to be ordered out for India as a whole and the possible Middle Eastern ordering, Rs 1 lakh crore of projects is what they should be getting in. So, around 20 percent growth in order inflow which the company has guided we think that they will be able to achieve that with around 17 percent increase in revenues and margins should in fact be up.

The company has been quite conservative in terms of the margins, but we think there will be slight upside out there. So, one need to start stacking the portfolio. Looking at some of these developments, which will eventuate. Not immediately but may be couple of quarters from now.

Q: Do you track any of these stocks and have a coverage on them – Ranbaxy or Jaiprakash Associates?

A: We look at both the stocks. In case of Ranbaxy our analyst in the medium to long-term is positive. There was concern in the market couple of days back on the company, receiving 483 notice from the US FDA for the Mohali plant. Our view essentially is that the issue doesn’t appear to be that serious. The company is in talks with the US FDA and hopefully the resolution should happen in favour of the company.

Jaiprakash Associates the view is that everything depends on the realisation of some of the asset sales. The company has been looking to pare down on debt by around Rs 230 billion. The company is looking at asset sales in several of its verticals like cement especially in the western and the southern sector. They are looking to sell it off and realize couple of thousand crores out there, which has been pending now for last one year.

The EBITDA per tonne for cement business also is expected to be under pressure in the first quarter. As compared to its EBITDA in Q4, we are expecting it to trend down quite sharply by Rs 150 in the first quarter. So, the pressure on cement business also will continue.