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Last Updated : Mar 16, 2016 07:49 AM IST | Source: CNBC-TV18

RBI may cut interest rate by 50 bps by end of CY16: Kotak Inst

Sanjeev Prasad, Senior Executive Director and Co-Head at Kotak Institutional Equities says, he expects economic growth from H2FY17 onwards.

Downgrade risks for corporate earnings are limited and recovery in commodity prices will contribute to earnings growth of many sectors, says Sanjeev Prasad, Senior Executive Director and Co-Head at Kotak Institutional Equities.

Speaking to CNBC-TV18, Prasad says he expects economic growth to pick up from H2FY17 onwards. He is mildly bullish on market despite downside risks from global factors.

Prasad is of the view that Reserve Bank of India (RBI) may be in a position to cut interest rate by 25 basis points (bps) in April and by 50 bps cumulatively by end of CY16.


On the equity market, Prasad says market does not have a short term trigger and he expects about 18 percent growth for Nifty by the end of the year.

Below is the verbatim transcript of Sanjeev Prasad’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Latha: What is the market telling you? It is a good 10 percent perhaps from the recent lows not so long ago actually, two weeks ago. Does the market now look priced in, will you walk in now and will you buy anything now?

A: I don’t see immediate upside in the market but having said that as we go into the second half of the year you would start seeing some economic recovery coming through. Based on 7 th pay commission recommendation getting implemented you should see about 50 basis points boost to the gross domestic product (GDP) from there. If you have normal monsoons then you would start seeing some pick up in rural economy which has been pretty weak as of now.

On top of that earning numbers should start looking a lot better as we head into the next two to three quarters because the earning base of last four quarters was pretty low. So, as we go forward into this March quarter you would start seeing a healthy earnings growth. As of now we are looking at about 18 percent odd growth for the Nifty 50 Index then I think there will be some more cuts over here.

However, we are probably getting in to the bottom of the earning downgrade cycle. I am comfortable with somewhere about 15-16 percent growth eventually for the Nifty 50 for 2017. So, if I put everything together maybe the market does not have a short-term trigger.

You had a decent run based on the strong rally you have seen an entire emerging markets (EM) class. So, India has being a relatively underperformer; given the fact that the commodity EM markets have done a lot better which is understandable given that you had a big rally in commodity prices. However, I am still reasonably bullish as far as second half recovery both in terms of the economy and earnings scenario goes.

Reema: What does this mean in terms of the Nifty levels that you are expecting?

A: If I look at by the end of this year assuming, let us say September 2017 numbers get discounted by them 9 months forward I would look at somewhere about Rs 500 earnings per share (EPS) for the Nifty between let us say March 2017 and March 2018 EPS. If I take for 17 September as an average I would get to somewhere about Rs 500 even assuming 3-4 percent earnings downgrade in both 17-18 fiscal year.

That Rs 500 if I take 16-17 multiple which is good multiple for India assuming we starts seeing some amount of recovery going forward which I think is the base case anywhere on top of that you would see inflation coming down plus rate cuts by the Reserve Bank of India (RBI) I think we can make a case for 16-17 price to earnings (PE). Then you are looking at about 8,000-8,500 for the market maybe 9-12 months done the line which is 7 to 12-13 percent upside from where we are. So, midpoint to take about 10 percent upside from where we are.

Latha: Which are the stocks that will take you to these Rs 500 earnings that you are expecting, the key leaders?

A: A lot of it has based on recovery in some of the sectors which have got thrashed completely. If you look at between March 14 and March 16 years anywhere the earnings numbers for the Nifty 50 is actually down about 5 percent. A lot of it is to do with sharp earning downgrades in the entire PSU banking space. Plus you are seeing reasonably high loan loss provision even in the private banks, some of the corporate oriented private banks. Tata Motors had a reasonably weak fiscal 16 numbers based on the China issues in the first 5-6 months of the year. On top of that energy and the entire commodity basket including the metal, mining companies the earning numbers are downgraded quite significantly.

In fact if I look at metal mining space for March 16 year whatever profit after tax (PAT) we have for the entire space is coming entirely because of Coal India. However, rest of the sector is actually Zero. Given the fact that you have seen some recovery in commodity prices plus the government imposed minimum import price (MIP) which will lead to improvement of anywhere from Rs 3,000 to 5,000 per tonne in terms of steel prices and most of it will show to EBITDA straight away. All the sectors will eventually starts contributing to earnings growth going forward.

I would also include pharmaceutical which had a relatively bad 2016 given the fact that Dr Reddy’s Laboratories earnings got hit because of all the FDA related issue. So, the good news is or bad news, I don’t know how to interpret is that 2016 numbers have got cut dramatically and if you start seeing some economic recovery and hopefully the scenario which you saw in 15-16 not repeating going forward there is a case for reasonably strong recovery based on a very low earnings base for March 16 year.

Reema: How are you selecting the stocks in the pharmaceutical space because one after the other we see the USFDA overhang on largecap as well as midcap stocks? So, what should an investor do with pharmaceutical stocks and how can they navigate through all this news flow?

A: It is a tricky one. First of all the stocks are relatively expensive barring Cipla among the covered stocks which we have most of them are still trading at 20 times on a March 18 basis, 20-24 times on the March 18 basis which doesn’t leave much scope for disappointment on either the fundamentals itself and in many cases I think there is some scope of disappointment over there. The street has generally assumed that you won’t see any hit in revenues and earnings because of any loss in profitability from the limited period opportunities. Many of these companies are having very high revenues from many of the products. So, there is some scope of disappointment there.

On top of that the FDA issues not only impacts current revenues you also could see many of the new products launches getting delayed quite significantly. All the ANDAS approvals getting delayed, new launches getting delayed so all that could cut into fiscal 18 numbers also. That is what my worry is for the sector as the whole.

If I look at Cipla that looks reasonably valued for the simple reason most of the earnings actually come from not so much from the US market but from India and South Africa which is not really getting affected by any of this FDA issues. The valuations are reasonable if you look at the EPS for March 16, we are somewhere looking at about Rs 22 for March 16 about Rs 26 for March 17. So, it is one of those few stocks that looks reasonably priced without that much of an earning risk which I see in the rest of the space.

Latha: I don’t know if you spoke about Lupin’s price targets would you buy it in this current dips?

A: Not yet, the problem with the Lupin is it is a fantastic company with a lot of revenue growth coming from the US. Now the problem is in the US there is couple of products which I am a bit worried about the kind of pricing assumption made by the street I don’t think they are going to come through. So, there is some risk of earning downgrades over there as far as street numbers are concerned. On top of that you the have the FDA issue now. So, I would be a bit careful about the stock at current levels and wait and see how both the pricing issue and FDA issue play out going forward.

Latha: What is the call on the two stocks that have done exceptionally well Tata Motors and ICICI? ICICI in the last 48 hours, 72 hours has come out of nowhere and performed and Tata Motors has been a steady performer? Will they be contributing in a big way to your 8,000-8,500 Index?

A: Definitely, these are two of our top picks in the model portfolio which we run. ICICI Bank the thesis was pretty simple for us at Rs 180-200. If I take let us say Rs 70 as a fair value for the subsidiaries put together and the stock was effectively available at about Rs 110 to Rs 130 about a month back adjusted for the value for the subsidiaries. The book value for March 2016 even assuming a very bad March 2016 quarter similar to what you saw in December 15 quarter will be somewhere Rs 115 even if you wipe out the entire net non-performing loans (NPLs) which has not been recognised as of now.
Even then you get a book value of Rs 115.

So, effectively it meant that you where getting a bank at a about 1 to 1.2 times on a March 17 core book value basis without assuming any further growth in the book going forward. Let us take a simple scenario of in the next four quarters you see the same kind of numbers which you have seen in the December 15 quarter. So, basically it is about Rs 65 billion of impaired assets which is similar to pre-provision operating profit of the bank. Let us assume the entire Rs 65 billion is written off which is a very aggressive assumption because obviously the banks does not have to write off 100 percent today. Even in that case assuming four quarters of Rs 65 billion been written off which means there is no profit at the end of the day, you are looking at somewhere about Rs 25,000-26,000 crore of NPLs being recognised which is somewhere about 6 percent of the total loan book of the banks which is about 12 percent of the total corporate loan book of the bank. That is a very aggressive scenario so that was the call on ICICI Bank.

Tata Motors, similar story the stock had come down quite lot and we have been positive on this for some time. The big problem was in March 16 year when the first half of the year you had a lot of China related issues. If you look at the most recent monthly numbers they seem to have overcome that problem. Next 6 months at least the year-on-year China number should look at pretty strong because you had very bad numbers in the same period of last year. Stock is reasonably attractively valued we are valuing the Jaguar Land Rover (JLR) business four time EV/ EBITDA. We have the fair value of Rs 450 for Tata Motors.

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First Published on Mar 15, 2016 10:18 am
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