Earnings likely to surprise; expect 6-7% topline growth: Expert

After subdued earnings in last few quarters, the market is hoping for recovery in the upcoming season. Last two quarters have shown green shoots, so expectations have risen for this quarter. “In the current quarter, earnings will surprise people,” says Nischal Maheshwari of Edelweiss Securities on CNBC-TV18’s special show Quarter Se Quarter Tak. Topline and bottomline both are expected to imprive by 6-7 percent after 6-7 flat quarters, he adds. Prakash Diwan doesn’t see many changes in earnings from the last quarter. However, he says that if earnings disappoint, market could be on its way to correction. This will be a buy on dips opportunity. Maheshwari expects pharmaceutical sector to see muted growth. Among pharma, focus needs to be on domestic companies, he says adding that FMCG will see 4-5 percent growth in topline this time around. Consolidation has set in product portfolio for big pharma companies, Diwan says. Mid-cap companies like Glenmark and Cipla are expected to perform better. However, the stress in the sector is expected to continue. Edelweiss is positive on commercial vehicles (CV) segment in the auto sector. CVs, which have been muted, are likely to recover from fourth quarter onwards.Below is the transcript of Nischal Maheshwari and Prakash Diwan's interview to CNBC-TV18's Latha Venkatesh and Anuj Singhal.Anuj: Prakash, your thoughts on how the earnings season is likely to pan out.Diwan: Very clearly, April to June, we saw most companies on the Nifty and the Sensex scrape through in terms of at least profitability. So, there is not much of disappointments there. But what the market is going to be waiting very eagerly with baited breath is going to be where the topline growth kicks in, in some way. As Varinder said, it is not a surprise if autos grow, it is not a surprise of some of the pharmaceutical companies do well, but industrials, capital goods, economy facing sectors are the ones where you need these green shoots to start seeing slightly more rapid transformation. So, my sense is the market is going to be happy with the sales growth if it is there and that will trigger off rerating for the last quarter of this financial year. But bottomline wise, last quarter was also equally good, so I do not see much of expectations building. In fact, if there is disappointment, then it could take the markets slightly down, but it is going to be topline growth that everybody is watching.Latha: Your overall analysis of second quarter, would it be a V shaped recovery in any parameter?Maheshwari: I think after almost 6-7 quarters we are going to see bottom line growth happening, I think 6-7 percent is what we are projecting for the universe which we cover which is almost 85 percent of the current market cap, so I think 6-7 percent growth and going ahead we look at even in the top line at around 6-7 percent kind of a growth happening.I think if you think that’s a V shaped from a negative to a positive growth yes it is, but yes it is going to be a positive after a long period of time.Anuj: It’s been a stock specific story of course for pharma, Aurobindo has done well, couple of others have done well, but rest have seen a bit of a derating, which ones will you pick for this quarter?Diwan: We could probably still expect Dr Reddy’s to continue with that weakness after the howler of numbers of last quarter or Lupin stressed that we have seen. My sense is the smaller ones if not the largest of the pharma players like Glenmark and all could probably be much better off. See what happen is just a quick comment on the pharma space between this quarter and last quarter numbers, there has been a consolidation on the product portfolio for most large players, they have focussed on things which make money, which they have strong on and let go of a lot of thing which don’t make money on, so from that perspective if you see the Glenmarks of the world, the Ciplas of the world will do much better than the Sun Pharma and Lupin and Dr Reddy’s.The larger portfolios are still kind of going through some consolidation which is work in progress, but I would definitely put my money on to the midsize or the second tier of pharma companies like IPCA, like Alkems of the world because they are more domestically align until US elections are out of the way pharma will also face a lot of rhetoric based pressure in some direct or indirect way.I guess December end would probably be the better set of numbers. This quarter you could probably see some stress continue.Latha: Your quick word?Maheshwari: I think pharma obviously would be a bit muted. We have not seen any big bang approvals coming through for the last quarter and there has been some one offs basically like Glivec in case of Sun, so you are going to see some strong numbers coming there. Similarly, for Lupin, but otherwise I think I agree with Prakash that focus should be on the domestic pharma companies.Latha: There have been a couple of problems for the FMCG space. One has been of course the Patanjali factor which has brought in more price undercutting and then the festive season or even the pre-festive buying has not been really strong. We are still awaiting rural demand. What will you pick from the pack?Maheshwari: FMCG sector for the current quarter is going to still not see the volumes pick up happening. That was sort of expected given that you have seen the rainfall actually coming in the current quarter and you will have the crop coming in the next quarter and you are going to see once again money in the hands of the farmers. FMCG obviously the growth is driven by the rural side than the urban side. That is why you are not seeing very strong growth coming there. So, I think it is going to be around flattish kind of earnings around 4-5 percent growth on the topline front.Anuj: Anything that you like in the FMCG space?Diwan: One observation that I have is, this is a quarter which is one of the most dull quarters out of all four quarters for FMCG players but it is at a cusp of a very good sales environment that it steps into.My sense is we are actually poised for a great buying opportunity of some of these names. If the volume growth in let us say Britannia is in the mid single digits, it will see a negative reaction and that is an opportunity to buy.If you see a similar thing let us say in the Godrej Consumer product which also has a lot monsoon related, mosquito repellent / preventive kind of products that will lead to its bottomline, that is a great area to step into. So, this earnings season will give you an opportunity to buy into these. Probably it is the last call, final boarding call for most of these companies and I am very positive on Colgate Palmolive, P&G, Dabur, Godrej, so that is the time you step in and buy in if the results are slightly weak._PAGEBREAK_Anuj: Autos has been the sector apart from banking which is taken leadership. Would you expect good numbers and are stocks still good buys?Diwan: The numbers are going to wait till the festive season is over to translate into earnings. We have seen some good sales uptick specially towards the latter half of this quarter gone by. So, that is not going to get captured so comfortably all across the board. So, you will have tractors doing some excellent stuff, you will have Maruti's of the world showing the premiumization impact, so better margins but not necessarily great volume growth. So, there is still a waiting period. My sense is again as I said in the FMCG side, great stuff if you see Maruti dip closer to Rs 5200 on back of weak numbers or what is perceived as weak numbers, you could buy in. The same thing goes for M&M now. So, there is lot of rerating that will happen. Escorts will get lapped up again because of the kind of strong numbers that will come through. So, interesting season from that perspective because you already have the sales ahead which are looking robust. So, good time to buy but you will get some dips as well from these numbers.Latha: What will be your pick of the pack?Maheshwari: I think what we like is the CV side of the business that’s not doing well at the moment, but in our expectation that the economy is going to revive. I think the CV pack is all going to start coming in with positive numbers, maybe from not from the next quarter, but fourth quarter should be good for them.We like Ashok Leyland out there, the stock has not gone anywhere in the last quarter rather actually has come down, so that seems to be our top pick for the moment.Latha: it is a large space capital goods, industrials variety. Do you like anything at all at least they are available at bargain?Maheshwari: The capital good is a sector basically which is sort of a late recovery kind of sector, so early recovery is obviously is going to happen in the construction and all other spaces and the late recoveries where the machinery part and all will come through, but we have our picks out there basically we like BHEL.We believe there is going to be substantial improvement as far as balance sheet is concerned on the BHEL side, yes jury is still out as far as how the growth is going to be coming in, but definitely I think we are seeing improvement in the balance sheet for BHEL.Similarly I think we like Cummins out there, so there are several of these stocks, Triveni Turbine is another one basically which we like which is being doing pretty well one of the midcap. There are several of the stocks basically the whole space has done very well and we believe in the current quarter earnings also they are going to be surprising people.Latha: What about the Voltas, Havells those that have a little bit of consumer durables and a little bit of capital goods?Maheshwari: Yes, numbers would be strong for both Voltas as well as Havells. The only worry out I see is especially for Havells the valuations runaway, so Havells is today quoting somewhere around if I am not wrong 36-37 times FY18 numbers. We need to have some surprise in earnings basically to make it more pliable.Anuj: Overall thoughts on the earnings season and how important it is for the market from here on?Diwan: I think given the kind of stretched valuation we perceive the market to be in, if earnings disappoint even a tad bit especially as I said earlier than the top line and on the margin side. You could probably start ripping the market for a correction and we saw that on the day of the surgical strike, when you lost 500 points on the Sensex just in a matter of few hours, that shows vulnerability from a valuation perspective. If let says some of these sectors which have not yet participated in the turnaround story or the green shoot build up start contributing this time and by virtue of that I mean capital goods, construction, engineering those are things that you need to kind of look at, because they are more economy facing and as Nischal said they are always back ended in terms of the growth.It time for the backbenchers to start performing, the front liners are anyways have been doing your NBFCs, your automobiles, oil and gas all of that has already taken off, so if that happens I think the season will end up being a fairly promising one and there could be some shift from the high valuation and auto ancillary kind of place that people would want to move out after this season, because finally it will catch up chemicals already the run ups been done. It is a bit ahead of earnings so watch out for these two pockets where there could be profit booking with the rest I think it is an open market for people to buy into these dips if the numbers disappoint even slightly.