Earnings season better-than-expected so far: Nitin Rakesh

Nitin Rakesh, President - Americas, Syntel Inc says the earnings season has been better-than-expected so far. He feels the earnings may have bottomed out last quarter. "We need to see how the rest of the season pans out," he told CNBC-TV18 in an interview.

The second quarter earnings have neither been spectacular nor disappointing. More or less the markets had expected that it will be a muted earnings quarter, but most likely this will be a bottoming out process of the earning process. This quarter had also featured with rupee strengthening in the sense forex losses which were seen in the June quarter. Probably those got reversed a little bit in the September quarter. Rakesh says investors need to take stock-specific calls now rather than market call. Also read:  F&O cues: Why Siddharth Bhamre is bullish on Nov series Below is the edited transcript of Rakesh's interview with CNBC-TV18 Q: What is your best prognosis between what happens between now and the end of the year given what you have taken away from earnings season? What do you expect to hear from the RBI next week? A: The market has seen a spate of good news over the last four weeks starting with the spate of activity in New Delhi. The earning season has been actually better than expected. So far, the large cap numbers have shown that we may have actually bottomed on the earning cycle last quarter. Obviously the markets have bottomed two quarters ago and that’s typically how you would see this. The interesting thing will be to see how the remaining earnings in numbers pan out. We still have few key ones to go. It looks like we will start seeing an uptick in earning expectations based on where we are today. We may be doing better than the 10-11 percent of earnings growth. Couple that with the activity we have seen in Delhi with the loose macro and the loose monetary environment globally, I think we are setting ourselves up for probably even rate action by RBI. I am not sure if it is going to happen next week. But between now and the end of the year we may actually start seeing the easing cycle take place. Q: Which heavy weight earning has surprised you the most where you can justify further upside both in terms of earnings as well as in terms of stock price? A: Yesterday was a pretty interesting day for the markets. L&T was a big surprise, purely because not only did they actually manage to show improvement in order book, but the margins have also improved. Bulk of this has happened from the domestic order book and that’s the key thing to note. The Engineering, Procurement and Construction (EPC) segment seems to have held up really well. That is good news because it is a direct reflection on the improving domestic macro environment as well. So, I think that’s probably the one I would say that has kept the hopes up in the market. In others like HDFC, ITC, they were expected to do well. That’s all in the price. Even to some extent L&T is in the price. I think people are going to take note of things between the lines and much more than the others. _PAGEBREAK_ Q: So if you do believe that the earnings downgrade cycle may have bottomed out, purely because of this trigger, what kind of an upside can you justify for the market going ahead? A: It is too early to say. We need to see how the rest of the earnings season goes by. Probably in a week, 10 days from now, we will be in a much better position. But based on where we are, the market seems to obviously have had anywhere from 10-15 percent uptick in the base. So, if you are at about 5000 base and bouncing between 5000 and 5400, that may have moved up by about 10-15 percent. So, we can clearly say 5600-5650 seems to be the base now. And you see the markets actually finding a lot of support at those levels. So clearly, on the upside we are now going to go above 6200-6300. It is possible at some point between now and another year based on what we are seeing from both domestic and global fronts. Q: People are circumspect about public sector banking and two-wheeler as well. Which are the pockets where you are cautious about the earnings season this time? Where would you still not be outright bullish? A: When you start getting into names like auto, you have to be very selective. You start getting into banks, you have to be very selective and real estate has the same story. Some of them will start seeing some activity sooner than the other. The same goes for construction and the rest of the infrastructure space. Oil and gas in particular also will probably not be the best performing segment this quarter. So, that is the way it is panned out. Interestingly, even in segments where you think all companies should have the same tailwind that, is not the case. IT is a segment where the diversity between Infosys and TCS is very apparent. So, it is probably much more of a segment specific, stock specific play rather than actually taking a call on the whole sector or the whole index. _PAGEBREAK_ Q: We are probably going to end with some equity gains in 2012 after a long time. Do you think one should extrapolate this for next year and say that we have begun a trend and may be next year it will be not very difficult to make money from equities again making it an encore of 2012? A: It is never easy to make money out of equities, unless you are in the last phase of the big bull cycle. I don’t think we are there yet for next year. So, I think it would still be a fairly select action. I don’t think you can extrapolate picking up anything and making money. But having said that, if we start the macro easing cycle and if we get into the environment where domestic macro starts to improve, I will expect that to last for the next atleast year or two. So, from that perspective it should be an easier time for the market in 2013 than it was in the first nine months of 2012.

Q: So in the next leg of a rate cut or a cut in the interest rate cycle, which are the cyclicals that you would bet on? Where you would be comfortable adding on to your portfolio? A: With the lag defect, you will start seeing activity pick up in the auto segment. We have seen car volumes at a dismal low growth rates. At some point, I think two-wheelers will start seeing that trickle down effect as well. I think banks as a segment, will start improving. Right now, it is very select large private sector banks are actually the flavour. But as that cycle turns around and the concerns around non performing loans goes away, I  think you will start seeing PSU banks come back into flavour as well. And at some point I think you will start seeing the ultimate end of the cyclical leg, which is construction and infrastructure come back into play. But again I think that is probably going to be the last one to revive. Q: What about the cement space? What have you made of the earnings in the cement sector so far? Beyond this 52 week highs that many of the cement stocks are sitting on, do you justify for the upside? A: I think it has actually been a pretty good time for them for the last 12 months or so. The counter cyclical trend started about a year ago and then we saw what happened from the competition commission issue. So clearly, they have taken the whole tailwind. The  numbers have been fairly impressive for Ultratech as well. Where they go from here, is a tough call but again, I wouldn’t say that that’s a screaming buy at these levels. I think there are other interesting plays in the market right now that you can focus on.