Midcaps creating alpha in the current market: Motilal Oswal Sec

Fourth quarter earnings are much better as estimates were moderated post December quarter numbers. Sectors that have been slow in the last one to two years have shown growth this time around, says Rajat Rajgarhia, MD of Institutional Equities at Motilal Oswal Securities.Sectors like cement, non-banking finance companies and retail lenders have reported positive numbers. The only sectors that are still subdued are corporate lenders -- mainly public sector banks and some private banks, he said. “We have to pick companies where growth rates are turning positive,” he said, adding that midcaps rather than largecaps are creating alphas in this market. In largecaps, the story remains same -- companies that were doing well continue to do well. Rajgarhia expects a 15 percent upwards earnings growth in FY17. The current year (FY16) will see flat Sensex EPS. Markets, too, will improve with a positive outlook for FY17 earnings, he said. "(If the) next three year growth outlook is better than the last three year growth outlook, you have to be into the stock," Rajgarhia advises. A space to bet on will be automobile, which did well even when the economy was down. He is bullish on names like Ashok Leyland, Mahindra Financial, Shriram Transport, IndusInd and Yes Bank. Below is the verbatim transcript of Rajat Rajgarhia’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: It is very heartening to see that this earnings season has been much better than what was expected and much better than what we have seen in the last couple of quarters. How have you read into it and where have the stars emerged from this earnings? A: You rightly summed it well that this quarter is surely turning out to be a better quarter because post the disappointment that we saw in the December quarter numbers, I think first the estimates itself got moderated and secondly we have definitely seen some pickup in many segments of the economy. I think cement numbers this quarter were good. A lot of the auto numbers that have been coming, have been good. Retail banks, non-banking financial companies (NBFCs) numbers have been good. Yesterday Larsen and Toubro (L&T) was a blockbuster; you have seen the reaction in the market today. So, a lot of the numbers and more pertaining to India where things have been very slow for the last two to three years, those numbers have started coming up well. So, I think excluding the corporate lenders which is largely the PSU banks and couple of private sector banks, the rest of the aggregate numbers have looked much better than what estimates were there. Latha: Should there be a change in the emphasis of the stocks you pick up? Until now many of your funds were heavily based on brand companies as well as urban consumer oriented companies. Now, would you give a little more space to the capital goods and the economy facing companies? A: In our institutional equities strategy report that we wrote about a couple of months back, we did highlight that we have to pick up companies where we think that the growth rates are turning for good. Many of these companies while they may operate in the bottom-up space or the midcap space, they have a lot of room to grow. Within the largecaps, I think the dilemma has been more and more severe where same set of companies which have been doing well, continue to do well with the exception of maybe one company like an L&T which after some slowdown over the last couple of years, has come back with a rebound. Otherwise in the largecaps, the story has not changed much.However, in the midcaps you are seeing many of the stories just turning around which is what is creating alpha in this market.Latha: What is your earnings estimate now for FY16, now that all the numbers are in and will you look to revise your FY17 earnings numbers? A: Fy16, those last two or three numbers of State Bank of India’s (SBI) and Oil and Natural Gas Corporation’s (ONGC), do change the aggregates meaningfully. However, I think fair to assume that FY16 we will end the year with a flat growth, flat Sensex earnings per share (EPS) growth over FY15. FY17 based on all the numbers that have come till now, I think one should look forward to upwards of 15 percent growth. Now, this 15 percent growth is a combination of many companies continuing to grow at 10-12 percent and some of the companies rebounding well from their lows which is pushing up their aggregate growth rate. Sonia: You spoke in passing about L&T’s good performance but just wanted a little more granular detail on what your expectation is from L&T going ahead and how much of a valuation rerating does L&T deserve post its numbers today? A: I think the management gave so many specific inputs on their guidance that a lot of their investors typically make their numbers around those guidance. They have a 15 percent growth guidance for order intake topline and a better margin. I think more than that exact number, that trend that the commentary where they ended FY16 on a very positive note and they are guiding very well for FY17, somewhere there is a cyclicality in the numbers and in the company’s operations. Whenever you get these companies where they are turning from a less growth model to a higher growth model, valuations always for me are secondary. I always first look at whether these companies next three year growth outlook is better than the last three year growth outlook; you have to be into the stock.