Nifty on track to report 10-12% earnings growth for FY19: Kotak AMC

In this environment, with a 3-5 year view, certain midcaps which have a strong growth outlook, sound management, strong capital allocation policies and have superior return ratios do provide an investment opportunity, Shibani Kurian, Sr. Vice President and Head of Equity Research, Kotak Mahindra Asset Management Company, said in an interview with Moneycontrol’s Kshitij Anand. Edited excerpts: Q. What is the sense you are getting from markets?  A. The sharp fall in crude oil prices is indeed a huge relief for India given the impact of higher oil prices have on the external sector, fiscal deficit, and inflation. This provides the much-needed breather for India’s macroeconomic conditions. Our view is that markets, however, in the near term would likely remain somewhat volatile or consolidate around the current levels. In the short term, cues from the upcoming state elections are vital and over the long run the trajectory of earnings growth in FY20. From a global perspective, the factors to watch out for include the growth trajectory in the US and the consequent Federal Reserve action, Brexit and the trade wars between the US and China. Q. Do you think largecaps still offer a better bet compared to mid & small-caps? A. Largecaps still offer stability in a portfolio. However, after the sharp correction in midcaps, their valuations are now converging towards largecaps and many of the excesses of the past have been erased. In this environment with a 3-5 year view, certain midcaps that have a strong growth outlook, sound management, strong capital allocation policies and have superior return ratios do provide an investment opportunity. Q. What are the sectors according to you are recommending to your clients and why? A. We are structurally positive on retail private sector banks and believe they would continue to gain market share in loans and deposits. Private sector corporate lenders are at an inflection point. These banks have seen new management take over, have a strong liability franchise and their incremental corporate slippages are reducing. All of this could in our estimate result in improvement in return ratios for these segment of banks. We are also positive on cement, some segments of auto and auto ancillaries, agrochemical and gas utilities. Q. After seeing September quarter results, do you think Santa might just grant our wish for pick up in earnings in December quarter? Most brokerages firms have downgraded Nifty EPS for FY19? A. The September quarter season saw the Nifty companies report healthy topline growth. With pressure on margins due to higher commodity and input costs, the net profit for these companies grew at a slower pace of 10.4 percent YoY. This resulted in downgrades to consensus earnings expectations for FY19. After these downgrades, we believe expectations are reasonable and the Nifty would be on track to report a 10-12 percent earnings growth for FY19e. Commodity cost pressure has also abated since then and this bodes well for the future trajectory of growth. Q. What are your expectations from the upcoming RBI policy meet in December? A. Given the focus of RBI in keeping headline CPI inflation under control, we expect RBI to stay on hold in the upcoming policy meeting in December. Even while core inflation has been sticky, with falling food prices, the headline CPI inflation has been undershooting RBI’s forecast range. Q. Given sudden appreciation in rupee, do you think it is time to re-look at IT and pharma?  A. In the IT sector, the short-term tailwind due to the depreciation of the INR is behind us. The CNX IT index has outperformed Nifty by ~20 percent in one year, however, it has underperformed by ~4 percent on a 1-month basis. Despite the near-term underperformance, it does appear that growth for most of the largecap companies would remain stable going into FY20. There are also some emerging signs of improvement in demand across verticals including BFSI, retail, and telecom. Valuations in the case of largecap companies have corrected and most of these companies remain significant free cash flow generators. Within the sector, however, there are some divergences in performance within the companies and that is likely to continue. Any adverse visa related regulations are the key risk here. Our view on pharma has been stock specific and same holds today. We have seen steady growth in the domestic formulations space and there are opportunities there. In the US generics market, the pace of price correction has abated and has now settled in the mid-single digit level and new drug approvals have picked up. However, for the sector as a whole, we do have to accept that the lifecycle of complex generics has shortened and this has a bearing on growth and valuations.