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See earnings growth in mid-teen percentage for FY17, like auto: Axis Securities

March 29, 2017 / 01:39 PM IST

In an interview with Moneycontrol's Tarun SharmaArun Thukral, Managing Director, Axis Securities said fourth quarter results are going to be worse than earlier quarters in this fiscal year. Hopeful of earnings recovery in FY18, Thukral also spoke on global events having a bearing on Indian markets, most notably elections in France and Germany. Closer home, he said, India's economy could grow at around 7.5 percent.

Do you see any correction in the market?

If we look at the picture after the UP election results, the markets have rallied sharply by around 10 percent. Compare this with last calendar year’s gains of around 1.8-2 percent. So, after 10 percent returns in barely 3 months, I think the market should consolidate and look for its next triggers.

Market participants and investors will be looking at the Q4FY17 results. Q3 results were better than expectations in many cases; Q4 results also are not going to be that great as compared to the last financial year. It is going to be worse than earlier quarters of this financial year.

We think the recovery should start in FY18, and we are looking at corporate earnings growth of around the mid-teen percentage for FY17. Markets will also take cues from monsoon predictions; there have been some worries, but I think we should wait for the IMD forecast on whether El Nino comes in the later half of the year.


The Seventh Pay Commission disbursals and a good monsoon should result in a pickup in consumption. However, these themes should play out now because remonetisation has already taken place to a major extent. People will now start buying automobiles, spend money on FMCG, or consumer discretionary goods etc. So, the consumption-led demand will help increase your industry capacity utilisation which currently is around 65-70 percent to a slightly higher number.

On the global side, the markets are watching the events like elections in France and Germany. If the anti-EU candidate wins in France, there will be some worries. The US Fed has talked about maintaining an accommodative stance - it means another two-rate hikes are on the cards in 2017. On the other side if the economy picks up very fast in the US, there may be more than two rate hikes. Any sign of an increase in the number of rate hikes will perturb the markets.

Crude oil prices are coming down and there is a feeling that it will come down further; even the US shale gas breakeven price has dropped. So, if the crude prices drop sharply to much lower levels there are chances of issues in Middle East economies and the money flow and demand from those countries will get affected.

How do you see the price to earnings (P/E) if you compare the emerging countries to Indian P/E. Do you think P/E is expensive as of now?

The P/E for FY18 should be around 18. In the last bull run, the market cap to GDP went beyond 100. Right now the market gap to GDP is around 78-79 which is reasonable.

In 2007-2008 bull run, if the Sensex was 100, the midcaps were trading at 120 and the small caps at 160. If a similar kind of calculation is done today, the Sensex is trading at 100, then the midcaps are quoting at 140 but the small caps are at around 115. So, the point I am trying to make is, when the smallcaps rally is very high, the small cap index goes past 160 or so like it happened in an earlier scenario. That is when irrational exuberance sets in. So, as long as we are below that level, I think we have the comfort of market valuation.

Also, just look at the performance of macroeconomic variable. If you look at CPI inflation, we are very much in control. It is around 3.65 percent. If you look at fiscal deficit, 3.2 percent looks achievable for the next year. If you look at current account deficit, I think, we have never seen this kind of low numbers. GDP will be around 7 percent for the entire year. Next year it may be around 7.5 percent.

Which are the sectors where Axis Securities is focussing on?

At Axis Securities we are very positive on auto and auto ancillaries. More so, on auto ancillaries because auto ancillaries have a twin advantage. They supply to the domestic companies and to the other global auto majors also. The export potential of the auto industry is growing because of the operational efficiency which India has developed; more and more global auto majors are comfortable setting up manufacturing hubs in India. We are of the opinion that the auto ancillary exports have the potential to repeat the IT and pharma export story. So, auto is going to be a good Indian consumption story as well as an export story. Hence, we are very bullish on that.

We are also bullish on infra, on account of the allocations made in FY18 budget. We have seen around Rs 4 lakh crore of investment in infrastructure space and within that NHAI cornered around Rs 64000 crore, Railways Rs 1.3 lakh crore. If any country has to progress, then infra has to do well. So, we are positive on infra. Within infra, we are more positive on the players who are into road building, metro building, EPC players etc.

We are bullish on some FMCG companies. As I said, there will be a revival of demand from rural consumer, from young consumers.

We are positive on the textile sector because China has lost cost competitiveness due to a rise in labour costs. We have become more competitive than China. We like integrated textile players as they have better control over their margins than the standalone entities.

What about metal?

We have seen recovery in metals. Now, the US is also talking about building infrastructure; so there will be more demand. China maybe cutting its production, but as of now we are slightly neutral or cautious on the metal sector as already some run-up has taken place in anticipation of demand from the US. Therefore, we are more positive on auto, infrastructure, textile and fast-moving consumer goods (FMCG).

Your thoughts on initial public offering (IPO) market. We have seen the IPOs in 2011 to 2013 and then we have seen the downfall in the market. In 2007 to 2009 period we have seen the downfall in the market and now again the IPO market is in a boom zone. How do you read the IPO market?

If there is a good quality IPO and if the primary market does well, it improves the sentiment of retail investors. Fortunately, for us, the last calendar year was very good; there were good quality IPOs, some five-six names where people made decent returns. In this year, people have been happy with both the IPOs whether it was Bombay Stock Exchange (BSE) or Avenue Supermarts (D-Mart) and going ahead we will have few more in the offing like National Stock Exchange (NSE), CDSL, etc. So, if there is a good quality management, if there is a tested business model, if there is a profitable company and if there is right pricing, which is very important –the issue is lapped up.

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