Overweight on autos; expect CRR cut on Oct 31: Jaipuria

Jyotivardhan Jaipuria, Head of Research at BofA Merrill Lynch expects aggregate earnings growth at around 10% for this fiscal year. "When we went into the result season we were looking at weakish growth. That’s what we are going to end up with. So there will be some surprises here and there and there will be some disappointments. But overall we should have earnings for the broad market being in the range of less than 10 percent," he told CNBC-TV18.

On the Sensex earnings front, Jaipuria does not expect an EPS higher than Rs 1,200. "The reason for earnings upgrades are probably coming outside of the earning season. It is the reform, which has got kicked off by the government, if that starts working and we start seeing corporate wanting to spend more, we start seeing infrastructure spend coming through, capex spend coming through. And that's what will lead to a trough in GDP and start to see GDP rebounding. That's what will lead to earnings starting to pickup again," he explained. Below is the edited transcript of Jaipuria's interview with CNBC-TV18 Q: What have you taken away from earning season so far? Would you say it’s been a bit better than your expectations?
A: It’s been more or less in line with the expectations. Generally the good companies, the companies that have done well, come out with results earlier than the companies that have not done so well.
When we went into the result season, we were looking at growth which was weak. I guess that’s what we are going to end up with. So, there will be some surprises here and there. There will be also be some disappointments, but overall we should have earnings for the broad market in the range of under 10 percent. Q: Do youthink that some of the earnings that are kicking in slightly higher than expected, like TCS or L&T or ITC, might nudge the Sensex number to a bit more above Rs 1,200 than you are factoring in at this point?
A: Yes, it could be. But along with companies that surprise, there are always some that disappoint and that’s where we start seeing earnings downgrades. We have to remember that big disappointments were expected in the global commodity companies. So, ex-global commodities, ex-metals and in some of these other global commodities, the growth was quite strong, like over 15 percent.
The commodity companies have not yet come out with results. It is on the other pack which is coming out with results that are generally expected to do well. So, there have been a couple of surprises, but there have been a couple of disappointments at the same time. So net-net, I think we are not going to go meaningfully away from the Rs 1,200 level on Sensex Earnings Per Share (EPS).
_PAGEBREAK_ Q: Anything in the earnings fine print that convinces you that we might be going through the trough in terms of earnings this quarter or next quarter earnings trough out and maybe after that you can see a small cycle of upgrades happening? Or you do not see that hint in the earnings yet?
A: It is not so much in earnings where we are probably seeing signs of an upgrade. Even in the last quarter, we had margins close to a ten year low. So, to that extent, at some point, we will see that margin re-rating coming. Infact, our call for the last two quarters has been that margins are more or less at the bottom but it is sales that need to come down. We are starting to see that now. Sales growth this season should be something like 12-13 percent.
The reason for earnings upgrades, are probably coming out of the earning season. It is the reforms that the Government kicked off. If that starts working and we start seeing corporates wanting to spend more, we start seeing infrastructure spend coming through, capex spend coming through, and that is what will lead to a trough in GDP. It will see GDP rebounding, and that is what will lead to earnings starting to pickup again. Q: You saw L&T's numbers yesterday. Any early signs from what the management said that capex confidence is going to build up from hereon? Can you see the cycle restarting or getting kick-started once again?
A: In the last one month, business confidence has picked up a bit. It may not be enough to start another big capex cycle just now, but the signs are starting to be there. So, if we can build on this positive trend, it could be quite interesting. Q: Do you expect any kind of help from the RBI? Is it possible that they start cutting as early as next week and then follow it up with some more cuts over the next nine months? Or do you think inflation will not allow them to do that?
A: Next week is going to be a very close call because essentially you still have inflation which is very high. So, I guess to that extent, the call would be not to cut rates.

At the same time, they have said two things. They want the Government to act on reforms, they want the Government to take steps to control fiscal deficit. And the Government has over the last few weeks taken the steps towards that.
So, I think that has probably put some pressure on the RBI to act themselves. There's pressure so that they can also be seen to be supporting the Government.
I think it is going to be a close call. Our house view is that we probably won’t see a cut. We will see a CRR cut but no repo cut this time. Now things are getting a little more evenly balanced. So RBI has the pressure to cut rates on lot of sources. Let us see what they really do.
_PAGEBREAK_ Q: Hero MotoCorp comes in with results today. Does two-wheeler look a difficult place to be in now?
A: Our preference since the beginning of the year has been four-wheelers. We like the four-wheeler companies in autos. We are actually overweight autos with most of our weight in four-wheelers. Q: What about public sector banks? What are your expectations there from this earnings season?
A: Our preference has been for the private sector over the public sector. The reason is the non-performing loans' (NPL) pressure is still high. So, the worry is that in the public sector we will probably get hit with NPLs, even though most of these valuations are looking reasonably cheap now. So, we are more tuned in towards the private sector at this stage. Q: What about telecom? That is also not expected to turn in a great quarter this time around. A: Telecom is something we are not very positive on. We have been a bit negative on all the regulatory issues going around. We still think stocks have a bit more downside before we really get more positive on them. Q: Have you as a brokerage started upgrading some names because of an expected earnings recovery. Between last quarter and this quarter, you have not done too many upgrades at your end? A: Between last quarter and this quarter, if you look at the aggregate picture, we have cut earnings by around 1.5 percent. This in some sense is down, but it is down at a much slower pace than what we have seen over the last 18 months. Broadly the consensus is very similar, but if you look at our numbers and consensus numbers, what everyone has, is quite a sharp recovery in earnings in FY14. FY13 now for most people is under 10 percent growth but FY14 is like a 15 percent odd growth for most people. So, in some sense analysts are building in a recovery in FY14. In case things do not work out, then you’ll see a downgrade cycle starting for FY14 also. _PAGEBREAK_ Q: What do you think might lead to this kind of downgrade in FY14? A: Generally, the reason most people do not expect a big downgrade in FY14 is because there have been some positive steps. So to that extent, on the margin we will probably start getting a GDP recovery, a capex recovery. Hopefully we will also see interest rates come down. So, that should help and once rates come down, we should see some companies doing well because the rates are coming down. The hope is that at some point, the global commodity prices will stabilize and we will not see too much of a hiccup coming in inflation, which starts to reverse some of these things. But we have to remember that global commodities are a mixed bag, though they help inflation if they come down. The problem is that, we have quite a few global commodities in our Sensex. As global commodities come down they start getting hurt. So, ironically an improvement in rupee or strengthening of the rupee or the weakening of global commodity prices actually hurts earnings though it helps the macro a lot. So, a couple of these factors going wrong could hurt things a bit but overall just given that we have two years of under 10 percent growth, hopefully we can get a 15 percent growth just partly in base effects in FY14. Q: What expectations do you have from the market performance next year? Are you optimistic or are you cautious about the market? A: I think markets next year will be largely a function of Government policies in India, because, part of the rally that we have seen has been just on expectations of lot of reforms happening. People today are willing to ignore the poor results. People are willing to look at valuations, though around average and accept that as long as they are going to get a recovery in the GDP and earnings, they are okay buying at those levels. In case that recovery does not happen due to reforms being stalled because of political issues. Corporate confidence takes much longer to pick up. There are lots of things that could go wrong in the world because the world is still a very shaky place. The market may not give us too much return otherwise, we could get some return linked to just a turnaround in the corporate performance. _PAGEBREAK_ Q: What do you hear from your clients about India now? Has their confidence in India gone up? Are they willing to buy the next dip whenever it comes about in the Indian market? A: Right from the day the reforms got announced, and that coincided with QE3, since then the mood on India has definitely changed. We have lot more interest in India than we had two months ago. Clients want to buy the dips; in fact I guess the FII numbers themselves are testimony to that. The amount which has come in, is close to USD 5 billion over the last few weeks. People want to buy the next dip. People are hoping if the reform process does not get stalled, we keep getting more and more reforms and in the interim people are willing to ignore the poor GDP numbers which will come out now, because everybody is hoping for a much better tomorrow.