See 17% FY17 earnings growth; positive on banks: Sanjeev Prasad

Fourth quarter earnings that have come in so far look positive to in line, on average, though some negative surprises may lurk in the second half of the season, says Sanjeev Prasad, Senior Executive Director and Co-Head Strategy, Kotak Institutional Equities.In an interview with CNBC-TV18, Prasad said he was positive on earnings this year -- forecasting growth of 17 percent -- partly due to the low base effect.The veteran analyst maintained that he was positive on private sector banks as well as autos (though, he said, some of it had got built into the price) but said he wouldn't hold out hopes for a quick turn in the capex cycle.Below is the verbatim transcript of Sanjeev Prasad's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What did the earnings so far indicate? It appears that even if the topline is not very flattening, it has been growing better than previous quarters and EBITDA performance has been excellent?A: Numbers have been quite good. If you look at Nifty-fifty companies that have reported so far, the year-on-year (Y-o-Y) growth is something like 11 percent at net income level and despite the fact that ICICI Bank had very poor results, if I strip that out then compared to our expectations, earning numbers are somewhere about 67 percent higher versus whatever we had as part of the result season.So clearly, numbers have been fairly strong across the board.  We had cement companies reporting very strong volume numbers as far as telecom numbers reported very decent numbers, auto companies have also been fine. IT companies in line so numbers are quite good so far.Obviously, now we will have the second half of the result season, which typically has more negative surprise than positive surprises, so keep your fingers crossed on the second half of the result season.Sonia: We have seen a lot of companies and stocks get rerated post a good set of numbers, cases in point names like IndusInd Bank, HDFC Bank, all hitting new highs today, names like Eicher Motors, Hero Motocorp from the auto space, what has your pick of the pack been, either sectors or on individual stocks?A: We have generally been quite positive on the private banks and continue to be positive on them.HDFC Bank is one of our top picks. It has been there for a fairly long time, we like ICICI Bank, we like Axis Bank, so generally we are more inclined towards private banks.Even auto names we have a rather pretty constructive view although of late I have reduced the recommendation of it given the fact that some of the stocks run up quite significantly. If you look at the numbers, whatever fear there was in market about some slowdown or weaker numbers, that hasn’t come through at this point.Latha: What about Yes Bank? There I guess the market has rewarded it handsomely, your thoughts?A: There has always been some amount of scepticism around Yes Bank's numbers given the fact that there are a lot of concerns around the bank when the asset quality review (AQR) exercise of the RBI was announced. People were assuming that they could probably see increase in NPLs as far as Yes Bank is concerned. That hasn’t panned out till last two quarters and the market has now taken a call that whatever concerns there were earlier, probably hasn’t played out so there is nothing to worry about at this point of time.Sonia: Another interesting theme that we are picking up is that there is a genuine pick up that you are seeing in the government capex cycle, in the government orders. We heard it from KEC International, we heard it from Siemens as well. Is that a space that is worth revisiting and if yes, what would your top picks be there?A: The challenge is that the common spending is ultimately a very small proportion of the overall gross capital formation even if you add up all the state government and central government numbers, the number only comes to about 12 percent of gross capital formation.So clearly, that is not going to move the needle too much as far as the overall investment cycle is concerned. Yes, it is a good thing that we have seen the government spending more aggressively within the constraints of whatever it can spend given its fiscal challenges but I won't be too excited on the capital spending, infrastructure space primarily given the fact that the private capex is yet to pick up. It is going to have 3-4 quarters down the road before it gives signs of recovery in the private investment cycle.Also keep in mind the fact that most of the sectors which could potentially see investment going forward whether it is railways or all the related areas, within the public utility services which is largely accreditation of urban infrastructure, most of the spending has to be done by the central government and the state governments and the local governments given the nature of these assets. So I was just wondering as to what role the private sector has to play in investments in some of these areas as we go forward. I would very surprised if they get involved big way in terms of operating assets. I won't hold my horses as far as the results are concerned.Latha: As you pointed out, the Nifty companies have surprised even your earnings estimates. So is this the end of that cycle where with every quarter, analysts were downgrading their estimates and by the way what are your current FY17 growth estimates, are you looking to up them?A: I think the earnings downgrade cycle has largely come to an end. You could still see a little bit of earnings downgrades and maybe some of the infrastructure led sectors such as Siemens where the market is running a little bit ahead in terms of recovery in investment cycle but having said that, I think we are largely done with earnings downgrade cycle. The good news is if you see the last four quarters, the base result is very low. So on that very low base, typically you would assume that we would see decent earnings growth.Coming to our own numbers, as far as Nifty-50 is concerned, we are looking at 17 percent growth. In 2014 and 2016 we haven’t seen any growth in the net profits of the BSE-30 or the Nfity-50 index so the 17 percent number has to be seen in that context. The base itself has become very low in some places. There is Tata Motors, which has had a bad 2016 because of the China related issues. Pharma companies most of them had one challenge or other. So if you put all that, in the base then you can assume that 17 percent looks achievable.Having said that, I still think there could be one-two percent downgrades and that probably would settle somewhere about 14-15 percent which is a very good number compared to what we have seen in the past two years.