Auto, consumer cos to gain from GST: Motilal Oswal Securities

For the negative impact of ‘sin tax’ one will have to wait and watch, says Rajgarhia. A sin tax is an excise tax specifically levied on certain goods deemed harmful to society, for example, alcohol and tobacco, candies, drugs, soft drinks, fast foods, coffee, and gambling.

When asked if he would revise the earnings forecast, he says it is yet too early because some of the big numbers are yet to report. However, he says the second half will look good because of the lower base.

He is disappointed with Interglobe Aviation numbers and has downgraded estimates for the stock. Although the company has a good market share, it will come under pressure from competition which will put pressure on the yields, he adds.

Talking about the subdued numbers from the commercial vehicular (CV) space, he says the last two years belonged to the CV space, which saw good volume growth backed by capacity additions. So, in the next two-three months, they could witness some consolidation but post that demand would return.

Commenting on the rapid growth seen in the non-banking financial companies (NBFC) space, he says in every growth cycle a set of NBFCs have 5-6 years of growth and then a new set of NBFC start performing.

Between the three outperofming stocks that is Maruti, Eicher Motors and Asian Paints, he says he would still go for Maruti because for them the growth in terms of volumes is yet to come along with sustainable valuations unlike Asian paints where valuations are beyond reach and cannot be justified.

Eicher, he says, will witness good earnings growth over the next 18 months but he still prefers Maruti.Below is the transcript of Rajat Rajgarhia’s interview with Sonia Shenoy, Anuj Singhal and Latha Venkatesh on CNBC-TV18.Sonia: We are trying to analyse the sectors that will benefit from GST and of course, top of mind are names like the auto sector, fast-moving consumer goods (FMCG). How would you read into this cue and from an investors’ point of view, how would you asses it?A: You need to analyse GST in three ways. First the positives that it brings to few sectors. Then of course, it has some negatives for specific names and third, how do investors view this development in the entire reform story of India.First on the positive -- vey obviously, many stocks in the consumer and auto space at big beneficiaries. A couple of stocks that come to the top of my mind, M&M, Pidilite, some of these companies can see significant reduction in specific categories and can boost their margins over the periods to come.On the negatives, we have been hearing about a sin tax concept that the committee had recommended. So, the categories which can attract this tax has been stipulated at as high as 40 percent. So, we will have to wait and watch out for that.The bigger story is how do investors view this development? Globally, you will see all the media covering this in their front page story as a big reform story and more over when this government came in power, Rajya Sabha -- which was a constraint for them -- at least in the last two years, has been worked around very well to pass reforms like insurance FDI, some other sector specific reforms and now, the big GST. I do not think there is any more big reform that investors are waiting now from a parliament passage point of view. It has to come more towards the execution of these reforms.Latha: This is a huge feather in the cap for the government and for the country’s equity markets as well. One has to buy here and now something which is of value at the given price. We were just discussing with Madhusudan Kela the same thing. Are you worried about the earnings season and do you want to revise your earnings forecast for the current year FY17?A: It is right now early to suggest if we will be revising because a lot of the big numbers, especially the numbers, which cause big upgrades and downgrades are yet to report. This time, you are anyway seeing an extension of the numbers coming in. But two things, which we should right now keep in mind for the earnings that the second half is of course going to look quite exciting -- first, because of a very poor base and second, lot of the positives have been slowly building up to push up the growth.Secondly, you will have to look stocks in the context of the valuations. So, some segments of the market have shot up so much that even if you factor in a 25-30 percent growth rate for the next couple of years, you will have to roll over your target prices to FY19 and whenever that event happens, it is better to take some money in the pocket and wait for better prices to re-enter them.Anuj: This is one question that I wanted to ask you post earnings. What did you make of InterGlobe Aviation’s numbers since you track that stock so closely? At current levels, is it offering a good entry point again?A: If you look at IndiGo’s numbers this quarter, they were definitely a disappointment and they -- with a very high market share almost 38-40 percent market share -- are also now seeing some pressure coming from the competitive landscape. The fair competition within the industry, in the short to very near medium-term is going to remain high. That is going to put pressure on the yields for the airline companies.Post this quarter, we have downgraded our estimates for the company and we think after this downgrade when we see earnings growth to be almost negligible for this year, my analyst has also cut the rating for the stock. So, we will wait to see the competitive pressures easing off maybe in the next couple of quarters before we review our rating again.Sonia: The other disappointment has been from the commercial vehicle space where we have seen a second or third straight month of lower sales coming in from all the big players. But names like Ashok Leyland have been great wealth creators in the past. At what point would you advice buying into names like these again or would you stay away entirely for the moment?A: In the entire auto pack, last two years clearly belonged to CV where volume growth was significantly lead by capacity additions in categories. What we hear from our own channel checks is that a lot of these capacity additions are now waiting for the demand recovery to happen. And I am very positive that October onwards we will see the demand recovery happening in all the user industries of commercial vehicles.So, maybe it is just another 2-3 months where you may see a period of consolidation and post that you will start seeing volume growth again returning back. Plus, if the government announces the long-awaited scrappage policy, that will be another boost to the volumes of the CV companies.Latha: The first sector that catches the eye in the midcap space are the NBFC. Some of them have seen a very rapid run like Bajaj Finance, obviously Capital First, even Bharat Financial Inclusion, even after the fall in the prices lately, is this still a buying opportunity?A: You would have covered these NBFCs for very long period of time. They are always growth plays.In every cycle of growth, they get rerated from starting valuation of one time book to an ending valuation of 5-6 times book. Till the time you get growth in them, people keep chasing and I have generally seen over the last 10-15 years every NBFC has a 5-7 years of sweet growth cycle. 2002 to 2008-2009 belonged to one category. 2010 to 2016-2017, we have seen another set of NBFCs. Till the time you have another couple of years of strong growth, some of these valuations may sustain, but the buying price points for many of these names are behind now.Latha: I just wanted to tell you, just now we flashed the news of Dewan Housing Finance Corporation (DHFL) getting money. Rs 4,000 crore was what they had asked, they got Rs 20,000 crore on day one from 55,000 applications so, largely retail. And it is at 9 percent. I guess since there is so much of pent up demand, it will list when it trades at probably 8.75. That is DHFL for you. So, do you think even companies like yours -- is the money going to get a lot cheaper for NBFCs, especially good reliable ones?A: Think about it -- the rest of the world is talking about whether there should be a rate of interest on the principle amount or not and here we are still talking in a system where you are getting such a high single digit rate of interest. There is going to be a lot of money given the differential in interest rates that we have. That is continuing to pull down the rates of interest in our system.I have no doubt that all these -- I still think that 9 percent cost of debt is still a high cost for the quality of franchise that DHFL has and these rates will keep coming down as investors would like to park more money in this high yielding instruments bringing down the rate of cost for them.Anuj: Three stocks where we have FY17 earnings per share (EPS) upgrades, but the stocks are horrendously expensive, Asian Paints, Eicher Motors and maybe even Maruti Suzuki India, not as much but still expensive compared to others.A: Between the three if I have to pick one, I will still pick Maruti, because I still think that the growth levers in terms of volume, the best of the volume growth is the next five years not the last five years. While the margins may still be at peak, the volume growth is yet to return. Given that the cash flow environment is going to get better, you may see these valuations sustaining.In case of Asian Paints, valuations are beyond the reach of what we can justify right now.Eicher Motors has seen massive rerating, but maybe next 18 months earnings growth is going to look strong but Maruti should still outperform the stock from here.