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Expect earnings to grow in mid-teens for the rest of the year: Axis Securities

Brexit-related developments, Italy accepting fiscal prudence measures, IL&FS saga as well as liquidity issues, along with elections in states and at the Centre to be key cues for the market ahead.

November 20, 2018 / 09:02 AM IST
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The market will be facing a lot of uncertainties in the near to mid-term. These include Brexit-related developments, Italy accepting fiscal prudence measures, IL&FS saga as well as liquidity issues, along with elections in states and at the Centre, Arun Thukral, MD & CEO of Axis Securities, told Moneycontrol’s Uttaresh Venkateshwaran. Over the long term, we continue to believe in the India growth story, he added.

Edited excerpts:

Q. What is your assessment of the current earnings season?

Earnings season so far has been muted. Revenues grew in higher teens, but results suffered due to higher input prices. At the latest juncture, they are reported to be flat.

Companies such as Vedanta, Asian Paints, Maruti, Tata Motors, Bharti, UltraTech, OMCs viz., BPCL, IOCL & HPCL, etc. have disappointed. It was a strong show by IT bellwether companies such as Infosys and TCS etc, (while there were) upbeat numbers from RIL. Robust growth was reported by the FMCG companies namely HUL, ITC, and Nestle etc.


Robust numbers from FMCG are pointing towards sustained growth, especially in rural economy. Consumption-oriented businesses also did well due to robust rural demand, attractive financing and reduction in soft commodities.

Select NBFCs such as Bajaj Finance, HDFC Life and corporate banks (ICICI Bank) reported a good set of results. Among the entire pack, corporate banks like ICICI have reported better than expected numbers which have kept the sentiment positive in this sector, post the IL&FS fiasco.

Cement sector continued to feel margin pressure due to elevated fuel, freight and power cost along with underutilization of capacity due to lower volume growth.

Telecom witnessed further fall in ARPU (average revenue per user) and aviation felt the heat of high fuel cost.

In the near term, good harvest along with higher MSP prices is expected to support the consumption-led story. We have seen a consistent recovery in the corporate earnings in the last 4 quarters and we expect it to continue with all eyes on the rate of growth. We expect a growth rate of mid-teens in the earnings for the rest of the year.

Q. How do you expect the market to perform for the second half of this fiscal?

Volatility is going to the new normal for markets in near-to-mid-term, say over next 3-9 months. Volatility would be induced by a variety of factors, be it domestic or global events.

Near to mid-term holds lots of uncertainties —

- Will there be a deal or no deal for Britain?

- Will Italy accept the fiscal prudence measures prescribed by EU?

- Will China not react to trade tariffs?

- How would the IL&FS saga be resolved?

- Will there be ample liquidity in debt and equity markets which would support the rollover of short-term paper floated by variety of domestic NBFCs over next 2 months (corporate papers to the tune of Rs 15 lakh crore is scheduled for rollover in November 2018 and Rs 7.5 lakh crore in December 2018)

- What would be the impact of state elections in Nov-Dec and who would form government at Centre in May 2019 etc.

Hence, we are of the opinion that the next 3-9 months are going to be consolidation with slight downwards bias.

Over the long term, we continue to believe in the India growth story as the country’s business environment is running strong and if quarterly earnings support, it might lead the markets back on growth trajectory.

Q. What should investors do in such a scenario?

The recent correction in markets can be considered as an opportunity to create wealth over long term. However, investors should be cautious while choosing stocks to buy.

One should do thorough analysis of the fundamentals of a company and select a stock/company with strong and visionary management. Once you are sure of the quality of stocks, invest in staggered manner over various price points (in order to benefit from the market volatility) with a long-term horizon.

Investing through SIP route is also a good option at the moment as it will help them in averaging the cost and reducing the risk of timing the market.

Q. What are the key headwinds and tailwinds to watch out for?

Headwinds: Liquidity evaporation in global markets due to US policy rate hikes and balance sheet trimming by central banks is a major headwind from the global front.

Further, FII outflows, depreciating rupee impacting exports, escalation of US-led trade war, crude oil production cut by OPEC nation, China’s growth woes and uncertainty around the domestic state and general elections are the other areas of concerns for Indian equity market.

Tailwinds: Record domestic inflows would help Indian equity market afloat amid global cues affecting the same, Crude oil prices have corrected from the high of $86/bbl to $70/bbl as an increase in production is expected from Russia and US.

Increase in rural consumption followed by good monsoon would drive earnings and political stability post general election would bring back the growth trajectory in market.

Q. What is your outlook on the metals segment?

We are positive on metals sector. Steel mills in China are preparing for production cuts ahead of upcoming winter to fight smog. Polluting industries like steel mills were instructed to install equipment to meet new ‘ultra-low’ emissions targets by October 31 deadline.

Given the pace of these installations, the metal production output from China is likely to be impacted which would be positive for metals sector in India. Steel prices are expected to be supported by rising infrastructure demand from US.

Q. What are your top 5 stock picks?

Reliance Industries | Target: Rs 1,346

Reliance retail and RJio are the segments leading the growth. Retail business has grown at a significant CAGR of 45% in the last five years placing it among the world’s top 5 fastest-growing retailers. The management plans to double the share of retail segment in the consolidated sales (currently 15%) by FY21.

Telecom business is continuously adding subscribers at rapid pace and we expect the same to continue. Recent acquisition of Hathway and Den Network would be big boost to its broadband services.

RIL is on the brink of completing the world’s largest petcoke gasification unit, when fully operational, the petcoke gasification unit will increase GRMs by up to US$2/bbl.

Ashok Leyland | Target: Rs 154

Domestic CV cycle has shown convincing turnaround; next 3-4 years are expected to good for CV OEMs given the triggers like pent-up demand following the good monsoon & heightened economic activities, pre-buying before BS-VI is implemented from April. 2020 and expected vehicle modernization programme which would involve replacement of vehicles with more than 15/20 years of age.

Post gain in market share between FY15-18, Ashok Leyland is now shifting its focus toward expanding and creating new revenue/profit pools by enhancing the product offerings.

The company has charted capex plans of Rs 1,000 crore for FY19 for expansion; 40% of the capex would be spent on capacity-related expansion while the rest would be utilized on R&D (BS VI and EV) and new product development.

Hindustan Unilever | Target: Rs 1,724

HUL offers 20% earnings growth visibility.

For this:

(a) its Winning in Many Indias (WIMI) strategy is enabling them to be agile and responsive to consumer,

(b) strong execution on Naturals portfolio,

(c) continued strong “premiumization” trend,

(d) extensively employing technology and data analytics to remain ahead of competition.

The 2-year volume CAGR is expected to be in the range of 6-8% which augurs well for growth, going forward. In Q2FY19, underlying volume growth stood at strong 10% owing to robust performance across home care, personal care and food & refreshments.

Rural continues to grow ahead of urban (but still not accelerated to the pace seen a few years ago vis-à-vis urban growth).

Along with price hike of 2-3% across products, cost-saving initiatives (6% annual savings) should help HUL mitigate inflationary pressure and thus protect margins.

ICICI Bank | Target: Rs 372

The bank is making a concerted effort to shift its funding to low-cost deposits from wholesale term deposits. This will improve ICICI Bank’s funding profile and further support NIM. The bank has been successfully leveraging its technological initiatives to augment the contribution of non-interest income towards its profitability.

Notably, management expects fee income to grow in the double-digit rate in FY19, mainly driven by the increase in retail fees. The appointment of Mr. Sandeep Bakshi as MD of ICICI Bank puts to rest leadership concerns.

Focus shifts towards growth and NPA resolution. The bank has been placing greater emphasis at scaling its retail / SME balance sheet franchise higher and exposure to better-rated corporates in the corporate segment.

Bajaj Finance | Target: Rs 2,642

BFL remains well positioned versus peers, in the current liquidity scenario. Its superior credit rating, access to funding and long runway for loan growth will help it gain market share while maintaining profitability.

BFL should be able to tide over the liquidity tightness in the short term on account of its large positive ALM gap in the <1-year bucket, its high balance sheet liquidity and its AAA-rating. BFL would also be ready to deal with a more sustained liquidity crunch by temporarily slowing growth, even though it can bounce back quickly.

The company has consistently improved the asset quality on back of prudent credit appraisal mechanism and also proper collection team. New product launches and increasing presence in semi-urban and rural area will help sustaining the current growth over the medium/long term.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Uttaresh Venkateshwaran
first published: Nov 20, 2018 09:02 am

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