Earnings to grow 20% compounded; bearish PSUs: Dron Capital

Below is the transcript of Pathik Gandotra’s interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy

Latha: What should be a trader’s view over here, should a trader now think of caution at all?A: From a traders perspective the market has consolidated quite a bit over the past three-four months. If you look at most of the index stocks they have still not crossed the highs of May 16 like ICICI Bank, all the private banks, lot of stocks there. And there has been a big consolidation in that space so there is still lot of steam left even from here.Latha: So you still trade long with stop losses?A: Yes.Sonia: The big space to watch today is oil marketing companies (OMCs) and with the fact that there will be no losses on diesel going ahead, would you still buy a stock like BPCL at Rs 670?A: With PSUs generally I am very circumspect, even the OMCs, state owned banks or anything because these policy change with time. Currently the fact that oil has come down and the government needs money to do some other program that is the reason why subsidy has come down to zero. I don't imagine these companies will function like private companies going forward because there is just no history. In 10-15 years we have never seen that so it is difficult to imagine. It can be a big change if that happens that can be very big but will I bet on the fact that it will happen, certainly no.

Latha: What are your expected returns from the Sensex or the Nifty over the next 12 months?A: If I give in percentage term, the index is currently quoting at 15-16 times ’15 and about 12-13 times ’16 assuming 15-20 percent growth in earnings. So, I think earnings will grow at 20 percent compounded in the next three years. There might be some delay in that, so we might have 15-18 and 25 kind of earnings trajectory. However, given that I would expect the index to compound 20 percent from here over the next three years and if that means next year, yes I think. You can get between 15-20 percent return on index 12 months from now._PAGEBREAK_Latha: Why are you so confident of earnings? I am asking you this because there is a lot of hope that this government will get things right but at the moment Q2 earnings are still showing you fairly despondent performance in many pocket as well the Index of Industrial Production (IIP) numbers or whatever macros you got, were not showing much growth. So, what gives you this confidence in earnings growth?A: Look at the earnings in this quarter, they have been the best from the last eight-ten quarters; the profit growth for this quarter, the quarter gone by and that’s been with whatever IIP growth that you saw. I am saying IIP growth will eventually drive topline, I have seen the IIP numbers; they were down by about a percentage point from the growth rate that you were expecting. I think that is fine. When an economy is turning, it will go through ripples before it turns. It will not turn in a leaner fashion. You might have a very bad IIP number coming in the next few months but that will not change the direction. Directionally the economy has turned. The issue is at what pace it will go up. Market was expecting the pace to be very rocking; it is just a bit slower than that. The market expected too much of reform momentum to happen. Reforms are happening; the government is doing a lot of stuff. The basic stuff is getting done because the market is expecting today a big bang reforms. When the UPA use to talk of big bang reforms and no deliverance on the ground, market would say where is the deliverance on the ground. I think this is a better way of doing things. Therefore, my view is the economy will turn today; the growth is coming from expanding margins because of cutting cost. People have held back on cost. When topline starts growing, you can say when topline starts growing that will start growing once the IIP turns and by third-fourth quarter of this year you will serious topline growth and that won’t stop in one quarter – that will go on for couple of years.

Sonia: Where do you expect earnings upgrades to come in terms of specific sectors and stocks?A: Across the board, may be not in IT but everywhere else, in all cyclicals.Latha: So what will be your leaders for this 20 percent rally that you are expecting in the Sensex and the Nifty?A: Clearly private banks and finance companies, I am talking about the overall market, not just the index. Look at it, we look at price to book, if we look at price to earnings, these private banks excluding HDFC Bank trade at 10 times next year. Some traded 10 times this year with 25-30 percent earnings growth. These stocks are very cheap by any definition if you are sitting on the cusp of an economic expansion. Second is other cyclicals say L&T kind of companies.Oil marketing companies will also show growth in the near term so once the diesel subsidy goes away I have a philosophical view that it depends on the oil price. If the oil price spikes up the government will not pass it on completely but that is where earnings growth will come from. Reliance Industries can grow its earnings.Latha: Will you have the courage to buy infrastructure, penny stocks some of them?A: Not as yet. I would still prefer stock like IDFC. I would buy stocks like KEC in that space. If I really want to be really adventurous I would buy real estate and you can buy the worst of them because eventually real estate will turnaround big time. that is the last thing to turnaround but it will turnaround big time. All the stocks there are almost same.