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Last Updated : May 30, 2016 10:51 AM IST | Source: CNBC-TV18

Post Q4 earnings, here's what we're betting on: Elara Cap

The fourth-quarter earnings season has come in mostly satisfactory. A revival should lead to an earnings upgrade, says Harendra Kumar, MD - Institutional Equities, Elara Capital.

The fourth-quarter earnings season has come in mostly satisfactory. A revival should lead to an earnings upgrade, says Harendra Kumar, MD - Institutional Equities, Elara Capital.

In an interview with CNBC-TV18, Kumar said he expects the Nifty to post earnings per share (EPS) growth of 17 percent in fiscal year 2017.

Doing a post Q4 analysis, Kumar discussed several stocks and sectors, picking out infrastructure, metals and autos where Elara has a number of stock recommendations.

In specific stocks, he picked out Schneider Electric, Indian Hotels, Sun TV and Motherson Sumi as offering immense potential for upside.

Below is the transcript of Harendra Kumar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: Where do you stand now on the public sector banks? Where do you stand on SBI?

A: SBI, clearly, is going to be in the midst of a restructuring for a prolonged period of time. Though the management has gone out and said the return on equity (ROE) will improve from 7 percent to 10 percent, I am not sure whether that is enough for the stock to re rate from here on. So, it will be the champion of the PSU banks, but whether it will outperform some other private banks, I am not sure.

On your broader question on PSU banks, I just want to put out a point here is you should take a cue from the Larsen & Toubro (L&T) numbers. So, if L&T numbers were to hold over the next three quarters which is the lead indicator for the economy, I would call a bottom of the PSU banks much sooner than what people would anticipate. So, this NPA provisioning is of a problem of the past. But if the core economy recovers, then the PSU banks could start to recover much sooner than people anticipate.

So, I would be very keenly watching L&T to actually take a call on how I want to trade the PSU banks going ahead.

Sonia: In fact, since you have mentioned L&T, let me take it from there. Last week was the return of the laggards, so to speak. A lot of companies like L&T, Tech Mahindra, ITC, all of them moved up. ICICI Bank posted good numbers. For some of these companies like &T, Tech Mahindra, etc. post earnings, would you buy any of these largecaps?

A: Actually, I would be quite okay with ICICI Bank and L&T for the reason that we have just mentioned. Whereas for ITC, we have a structural sell because we believe the government is going after what you have seen as sin tax or sin companies and this will become much more elaborate and progressively become more and more imminent in their discourse over future budgets. So, we would not want to fight the government in areas where they are very hung up on.

So yes, among the stocks that you mentioned, is clearly ICICI Bank and L&T where we will have a positive key on. Tech Mahindra, we have just downgraded from a reduce to a sell where our analyst is just a little sceptical on the recent acquisition that they have done.

Sonia: I wanted to come back to some of the earnings performances this time. As I was mentioning some of these infrastructure plays like Crompton Greaves has done quite well. You mentioned that you would suggest buying into L&T. Apart from L&T, is there anything you would like from the capital goods/infrastructure space?

A: There is a whole gamut of opportunities which are opening up on the solar capital expenditure side. But mind you, some of the larger names which are aligned to the Capex revival such as Siemens and ABB are extremely overvalued. So, they are priced to perfection.

So, if you need to find opportunities, it needs to be potentially on the smaller names, somewhere where the government impetus or impulse is going which is on transmission and solar. So, you have one name which is Schneider Electric, you have Shakti Pumps, you have some of these smaller names and of course, the power utilities which are currently underpriced which is Reliance Power, one of our top-picks.

So, there are opportunities on the power and the capital goods side, but you need to be extremely selective out there.

Latha: Generally, what is the sense of the earnings season itself? Did you have more upgrades than downgrades? In the midcaps, we counted a 6:4 in favour of upgrades, or in favour of good performance. Let me put it that way.

A: Out of the 275 companies in the BSE 500 that have come out, there is an 8 percent surprise on the sales and over double digit surprise on the earnings. So, this is for the first time. Last time also I mentioned that the sell side will be behind the curve and there will be upgrades progressively going ahead. And this is pretty much manifesting in this results season. So it gives us a fix on where the Nifty earnings or the broader economy earnings are. And so what you need to do is actually go out and price it. So, that is the only gain that is available over the next 12 months.

I think again, I want to add on the rupee side, what is very important is to look at the stability of the rupee and what it does to India’s cost of equity. So, while earnings will find its trajectory, it is about the price-earnings ratio (P/E) rating over the next 24 months that needs to be watched. So, that is a big key variable that as a country or as an economy, if you have to attract flows, is what you have to watch out for.

Sonia: What about some of these companies in the auto space? We had some really good numbers this quarter from the likes of Bajaj Auto, Motherson Sumi, etc. what topped your list this time?

A: We like what Motherson came out and reported. There is a mismatch between what the buy side or the fund managers feel and what the sell side feels. There is a margin that is still from their overseas subsidiaries that can be pencilled in. So we continue to like it, we have a 34 percent upside on the stock. We are overall positive on the auto sector per se because it is the top pick in terms of the consumer discretionary play. Plus, it has a humongous rural angle as well. So, structurally, we are positive and I think the whole value chain will continue to do very well from here.

Latha: There have been a bunch of numbers that have come out which looked very good. The entire sugar stock looked good as well, over the weekend, even some of the infrastructure stocks, ARSS Infrastructure Projects, PMC Infra seemed to look good. What are your top-five midcaps now?

A: Actually, on infrastructure there is not much potential price upside because they are being priced to perfection with the order book and the street has been tracking that quite aggressively.

Latha: No, any sector.

A: We like the hotel pack. We like Indian Hotels out there. It is a structural buy over the next 2-3 years because the cusp of the economy moving upwards. Some of the power capital goods names that I did mention. And we have some contrarian bets on Sun TV. Beyond the Tamil Nadu elections, there is a new management now out there. There is a big re-jig in the staff count. There is a new content impetus. So, that is one stock that is mispriced. There is a huge amount of risk priced in. Over the next 1.5-2 years, that will get readjusted upwards. So, that is one outlier.

Latha: Hindalco is starting with an 8.8 percent uptick and BHEL is starting with a 4 percent downticks. How impressed were you with Hindalco because some of the margins looked excellent as well as how long would you be away from Bharat Heavy Electricals (BHEL)?

A: BHEL, we are not positive, but yes, we have had a change in our stance, in our basic materials, sector picks. So, there has been a change in the process queue. For now, in fact, we have four buys on that list. So, you have Hindalco, Vedanta and JSW Steel out there. So that in itself tells you the outlook on some of these stocks which was actually very bearish is clearly indicated that things have bottomed out and things could recovery from here. So we have upsides in all these stocks which are significant given the way the nature of these stocks are.

So, if you are looking at a beta trade to continue, you would probably play on with Vedanta, JSW Steel and Hindalco.

Sonia: The other two stocks that has hit that psychological Rs 1,000 mark or the four digit mark last week was YES Bank and Asian Paints. Both very good numbers and strong uptrends. Would you put incremental money in either of the stocks?

A: You have to know that they have been leading the market rally and yes, has been part of the top performing financial stocks. But, closer to Rs 8,400 on the Nifty, I would think some of these stocks would start to consolidate. So, another 200 points on the Nifty, we would start to take profits out of the stocks that have contributed to the Nifty gains.

Things are pretty hunky dory for YES Bank. So, I would say that it is not a structural sell. It would be remaining a structural buy, so you need to be tactical when you take profits out and when you re-enter. And that is pretty much how you play some of the private bank names over the next 12 months.

Latha: Give me an idea of what is your earnings growth number for FY17?

A: We have around 17 percent for the Nifty and that will hold very strongly. Generally, we are a little less than the consensus, but this time around, we are 200 basis points higher and I think we will meet those numbers.
First Published on May 30, 2016 09:40 am
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