December quarter corporate earnings may have been tepid, but things are likely to be much better in FY16, says Anup Maheshwari, executive vice president and head of equities, DSP Blackrock.
Maheshwari sees 15-20 percent growth in earnings next year, led by expansion in operating margins.
In an interview to CNBC-TV18, Maheshwari sees retail investors returning to equities in FY16.
"If you look at roughly USD 400-450 billion worth of savings in the household level every year, incrementally if we start seeing a little bit of a tweak in terms of moving from physical to financial assets which is where there is a big skew at the moment, we think we could easily get anywhere in the region of USD 15 billion or more of domestic equity flow into our markets on an annual basis," Maheshwari said.
Net investment by overseas investors into Indian equities was USD 981.5 billion in 2014. Below is the verbatim transcript of Anup Maheshwari's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: We are very close to old time highs, the past year gave us 31 percent in terms of returns, do you think we can do something at least close to it this year?
A: We have had three decent years so far if you look at it about 30 percent in 2012, 6 percent in 2013, close to 30 percent in 2014 as well but what is more important is what is our earnings progression along the way. This is the year where we are getting a little more positive about earnings growth moving out of that 8-10 percent range that we have been stuck in for the last four-five years to a slightly higher range between 15 percent and 20 percent. So that tends to then be a key driver of valuations in the future. So just because our markets are moved up, doesn’t automatically mean we start from ground zero all over again.
The way we are seeing this phase and I wouldn’t go by year-by-year but I would just say over the next few years, the way we are seeing things, as we get into this earnings uptick, logically we should see markets doing reasonably well even if markets were to move in line with earnings that is still quite reasonable and more importantly for domestic investors, the choices are very limited. So even sort of a 15 percent in annualised returns, which is a normal standard indication for equity markets long-term, it looks fairly good from current standpoint. So we are entering the year fairly positive.
Sonia: A little more on valuations, what are your earnings estimates for this year, that is FY15 and for the next year that is FY16? I am asking because the macro data like index of industrial production (IIP) is still very weak. So is there a chance of seeing any downgrades before we see any upgrades?
A: Yes, already with this quarter - this quarter is not expected to be a very good quarter and the trends we are seeing is that sales growth is ending up being much lower than what was originally estimated. So it is quite clear that this recovery is a little slower than we would like to see.
However, with this quarter numbers itself, there will be some downgrades. So, this financial year 2015 numbers which right up till maybe two quarters ago, people were still looking at maybe 13-14 percent earnings growth are more likely to be maybe closer to 10 percent again but that is sort of a year that in another three months will be done. I think if we look beyond that into FY16, we are looking at it being definitely a superior earnings here more in the region of 17-18 percent and more importantly while the absolute earnings number may show some downgrades but the breadth of results is improving. So what we are beginning to see right now is there are a fewer number of companies impacting the earnings growth number overall rather than it being spread across the wide range of companies. So, on a wider basis, the quality of earnings is improving although the quantity of earnings is not if you get what I am saying. So that is the qualitative change in earnings that we see which is coming through. So you may have a downgrade coming up right now but I think as the year progresses, we will probably see some better numbers coming through for next year.
Latha: You also referred to domestic flows, what are your own flows? How do you estimate how much will come to the domestic MF industry this year?
A: The floors have definitely improved across the industry in the last seven-eight months and we have seen some of that as well. We are very positive on the next 24 months in terms of how some of these flows are going to change in the more positive direction. The one thing that we see is currently equity ownership in India is sitting at fairly extreme levels on the lower end and these don’t sustain for very long. So if there is one trend, we are very confident about it is the fact that domestic flow into equities will increase and fairly substantially in the next couple of years. if you look at roughly USD 400-450 billion worth of savings in the household level every year, incrementally if we start seeing a little bit of a tweak in terms of moving from physical to financial assets which is where there is a big skew at the moment, we think we could easily get anywhere in the region of USD 15 billion or more of domestic equity flow into our markets on an annual basis.
Sonia: Which stocks will be the leaders in the Nifty this year, last year it was financials and it was stocks like Maruti Suzuki but what is the prognosis for this year?
A: We are hoping there would be a bit of a value bias in the market this year; that hasn’t been the case for quite sometime now. In a scenario where you have lower inflation, lower interest rates, a lot of operating margin improvement – when we talked about the earnings number earlier while sales growth may be muted but operating margins are going to increase because of lower raw material costs now. If interest costs also head lower that further increases your earnings growth number. So, there is a bigger mismatch between your revenue growth and your profit growth.
However, there is a lot of leverage on both sides so our sense is that interest rate sensitive names should logically do a little better or will have more earnings delta. So, to that extent banking still remains one of our overweight or largest positions in the funds as it is pretty much across most banking, consumer discretionary, the auto names who are also to some extent rate sensitive. These are two of the key sectors that we are overweight on and then some of the more longer term sectors like pharmaceuticals are looking interesting.
Latha: You are pretty overweight on financials, you have about 20-22 percent in banks and then other 8 percent odd in financials. You are going to increase this also incrementally?
A: As an absolute weight in our portfolios probably marginally but not significantly because there are some risk management approaches that we have to adopt. So, we can’t end up with one sector being beyond a certain percentage in the fund. So, this is a big exposure already and we will just manage it around these levels.
Latha: Where will the beta come this year; that one or two sectors which will perform way above the market – will it be something like logistics or digital companies, pizza companies?
A: It is still going to be a bit of bottom up investing where we have seen the midcap segment do extremely well last year. I think the upper end of the midcap segment is an area that we are looking at very closely now because these companies are fairly largish, heading towards becoming largecaps and still have potential for higher degree of growth and not as high valuations as some of the largecaps. So, we are looking at some of the larger of the mid size names as a segment but then it all boils down to what stocks you pick – it is not like the whole segment will necessarily do well but that is one area that as part of the market cap pool that we are looking at.
Apart from that, within each sector there will still be relative performer so although we are underweight consumer staples but we would have one or two names there that we think can do well irrespective of how the consumer staple sector does.
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