Expect FY16 EPS downgrade; FY15 earning to grow 5%: Motilal

Rajgarhia is hopeful that the ‘Make in India’ theme will instill confidence in Indian companies. He sees state playing an important role in the success of this project.

Below is the transcript of Rajat Rajgarhia's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Latha: At the end of the result season are you still enthused to continue buying stocks?

A: I must admit this result season is one of those rare ones where we have seen a very high number of big misses in the big stocks right from the beginning till the end. Almost everyday has been some kind of negative surprises.

While at the aggregate level we may have estimated about 4-5 percent growth, we are now preparing with may be a 3-5 percent decline in the estimates for this quarter. Somewhere the whole downgrade cycle which had stabilised in the June and September quarter has just taken a big leg down in the December quarter. We are quite surprised by the extent of decline that we are seeing in companies across the board.

However, the markets are right now focusing a lot on macro. Stock specific, even as you mentioned about Bharat Heavy Electricals (BHEL), even if the stock is down today 5 percent, it was up 5 percent yesterday. So, it just negated that up move. Right now the market looks to be little disconnected from the way the results season has pan out but market have their own wisdom, they focus more on future and not so much on what got reported.

Latha: You were expecting at the start of the earning season a 4-5 percent rise in sales but what you have noted so far is a 3-5 percent decline in sales, is that right?

A: I am talking about the profits.

Latha: What does this do to your future analysis, your extrapolation? Are you pushing back the quarter in which you will see earnings starting to improve?

A: Yes because this year looks like 10-11 percent kind of an earnings growth at the aggregate level should have been done. However, it looks like that that 10-11 percent may get scaled down to now just at about 5 percent or so. If March quarter does not show any improvement over the December quarter then we should brace for some more setbacks into March quarter numbers.

One of the important points is that while the domestic earnings continue to be very weak the export businesses were driving up the estimates because the currency has stopped becoming a tailwind and many of the global prices have been under pressure, even those earnings have seen downgrades for them. So, which quarter we are going to see the recovery, I cannot pinpoint but we are not going to see recovery at least for another two quarters in the estimates.

Reema: Would you change your assessment of FY16 then because earlier the market was expecting an earnings growth of 15-16 percent in FY16, would you scale that down now and if yes to how much?

A: What is more important is that even if the earnings growth for FY16 may not see any meaningful downgrade, the number still may be above 15 percent. The base number itself is changing so if earlier you were expecting a 15 percent growth on 100 then that number would have been 115 but now if you are expecting a 15 percent growth on 90 then that number becomes 105. So, the absolute earnings per share (EPS) for FY16 itself will see a downgrade.

However, let me admit that given that we are into such a volatile business environment both globally and locally, 15 percent plus estimate is what you will see consensus building on but a lot of those earnings growth would still be centered for the second half. The first half would be about 10 percent, sub 10 percent and the second half would be maybe a 20 percent kind of a growth.

Latha: You have some interesting officials from the Maharashtra state government as well. What have you gleaned so far? Are the states prepared for a Make in India’s ambience because it’s a plethora of permissions that in the first place actually put off manufacturing and manufacturers from India? India became a service oriented country partly or almost entirely because of maze of restrictions from the state governments and because of poor infrastructure. So far what have you gleaned and what are you trying to glean in your conference?

A: There are two important data that we look at. If you look at India’s share of industry in the overall gross domestic product (GDP), for almost last two decade that number has now remained stagnant at about 15 percent. Gradually being coming down as services have grown also and India’s share of manufacturing as a percentage of GDP is one of the lowest amongst many comparable nations; we may not compare ourselves with China, which stands at about 35 percent plus but even compared to many other countries we stand quite low and that is a result of many things.

Over the last many years a very common terms that’s being used is the ease of doing business but there have been many setbacks which have crept into the businesses at all levels; right from the centre to the state to the funding mechanism and maybe the way the businesses conceptualised internal rate of return (IRR) in many of the projects and these things over the last three-four-five years has taken a significant knockdown. The amount of money that we have seen Indian corporate spending outside in buying businesses or building businesses has been serious. So, this whole theme of Make in India now is basically to instill that confidence back into various segments that if the target market for the rest of the world is to sell in India then why not begin by the concept of Make in India so that the whole process of doing business becomes easy.

I think states play the most important role because that is where businesses ultimately get set up and that’s way we have people from the state machinery or some of the experts in today’s conference, who have worked in different capacities at various state level, will explain what will it take to make this Make in India a very powerful theme over the next one decade to come.

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Reema: So far with respect to voices around Make in India, we have only heard of developments around defense. Which are the other sectors where Make in India can contribute meaningfully?

A: One of the biggest sectors that India can make itself as the global hub across the world is auto and automobiles because that is one where the competency of low cost manufacturing is very higher for us. Defense is just about beginning to start. This could well be a massive opportunity over the next one decade.

Railway is another where we will start seeing significant investments coming up. Nuclear, power, electronics, our share is so low right now and as a country with 1.3 billion people with rising per capita, our consumption levels are going to rise significantly. In the first leg we have to see that how do we reduce the dependence of imports for a lot of the consumption that we are doing and in the second level we have to start looking at boosting our exports, so that we are truly able to utilise the low cost high skill competency which lies in this country.

Latha: Are you betting on any stocks at this point in time on this theme?

A: This theme is going to present opportunities across the sectors, from capital goods to financing companies to equipment manufacturers, logistics almost everyone. I do not think this story is about a particular stock. This story is about rerating the entire domestic space of the country; everything relating to investment cycle to industrials to people who finance them and be in the supply chain management should be big beneficiary of this theme over the next many years to come.

Reema: How much do you think Make in India can contribute to the GDP and by when?

A: I wish I can give that number but let me at least give the direction that at 13-14 percent share of manufacturing right now in the overall country, this number can definitely double up over the next one decade. However, keep in mind that the services continue to grow at a high single digit. So we are talking about growing our manufacturing over the next one decade in double digit. Unless we set targets for numbers like those, I do not think Make in India kind of themes will become successful. We have to target numbers where manufacturing grows faster than services.

Latha: What is your earnings growth for this year and next year?

A: We have not yet frozen because today there are going to be large set of index companies; today and tomorrow. Almost 1/3rd of Sensex companies are yet to report between today and tomorrow. However, once we get those numbers, on Monday we will finally make our number, but as I mentioned that number should at least see downgrade of anything between 3 and 4 percent for this year.