It is still early days, but expectations from this earnings season is low, says Gautam Trivedi, MD and CEO of Religare Capital Markets. At the moment, he says the risk-reward is favourable to invest in the market. Though he adds that despite the issues in china, foreign investors continue to prefer China over India.
However, he adds that the domestic mutual funds industry continues to see inflows. On the back of which he expects the Indian market to remain buoyant. In terms of earnings, he says FY16 will be in high single digits, and FY17 will be the big year.
On stocks that are in focus due to their earnings, he is bullish on Infosys and does not think it needs to trade at any discount to TCS. He also continues to like Asian Paints despite the cautious comments from the company's management on Tuesday. He also advises investors not to buy Sun Pharma at current levels.
Trivedi is also bullish on Maruti and Ashok Leyland in the auto space, and Bata from the consumer space.
Importantly, he says rural slowdown is not as bad as expected - 18-20 percent growth in FMCG sales is coming from rural India.
However, he is not too enthused about the FMCG space. Valuations of HUL, Dabur and Emami are expensive, he adds. According to him, foreign investors find the FMCG space too expensive to put incremental money in to it.
Below is the verbatim transcript of Gautam Trivedi's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: We got a bunch of Nifty earnings yesterday and we have got some early birds. What is the sense of this earnings season itself? Will all of you have more downgrades rather than upgrades in the end of the season?
A: It is early days to say anything but the fact is the expectations are quite low which is actually good news. The way Infosys reacted at 12 percent move it hasn’t been seen in Infosys in a long time. So, the fact is that expectations were so low and Infosys surprise obviously took the market by a shock. At the same time the other end of the volatility is what happened with Sun and their guidance for not so great results going forward.
Latha: What is the view on Infosys itself and the other IT companies?
A: Infosys remains the top pick in the IT space and we believe that it doesn’t deserve to trade at a discount to Tata Consultancy Services (TCS). So, we think that Infosys should regain some of its valuation gap that it has right now with TCS.
Sonia: What about the market itself, is the risk reward favourable to invest into the market now or is it better to up your cash levels?
A: The risk reward is positive right now. I just got back from Asia, I was in Singapore and Hong Kong last week and I am saying this on record that the fact is I am quite surprised to find that in spite of the fact that in China companies can suspend trading in the stocks within five days and as long as six months – when the market crashed 30 percent as many as 60 percent of the companies had suspended their stocks and unfortunately foreign investors and domestic investors were compelled to sell the stocks that were not suspended. So there is further accentuating the fall of the market.
Imagine a rule like that if it is allowed in India the havoc. In spite of that what we found is we met over 15-20 investors and we were stunned and shocked that the love affair with China still continues. So, it is not as if in spite of the 30 percent correction and in spite of the fact that as many as 60 percent of the companies were suspended you couldn’t actually sell, you couldn’t get out of those companies. Foreign investors continue to like China and they like India but they like China more.
Latha: What is the lesson therefore, that we shouldn’t expect too much? The real question is at 8,600 will you buy, you say yes?
A: The answer is yes selectively of course. I don’t mean the whole market but the answer is yes.
Latha: What would be the bright spots, IT you said, Infosys you said?
A: IT, autos, we like Maruti Suzuki, we like Ashok Leyland. These two stocks will continue to do well. We have had these road trips as you know, we have done three of these road trips to Gujarat, Maharashtra and Uttar Pradesh and we found Maruti showrooms packed with customers. So, that stock continues to remain one of our top picks.
Ashok Leyland in the commercial vehicle (CV) space in particular, the medium and heavy commercial vehicle (M&HCV) is having a major rebound. So, we like that as well.
Sonia: Another stock you like is Asian Paints and that one also delivered a good set of numbers yesterday. The commentary from the management was a bit cautious, would that spook you or would you continue to remain invested?
A: I see where the management is coming from. First of all I am not spooked, I think it is a great story, it has returned great shareholder value over the last 10 years. However, the reality is that the real estate space within India has slowed down and it is not just a phenomenon for Mumbai, Pune or the NCR region, it is across the country. So, that clearly has an impact on Asian Paints to some extent. So I suspect some of the cautiousness is coming from there. However, otherwise we very much like Asian Paints and remains one of our top picks.
Latha: What did you make of Hindustan Unilever (HUL) commentary? There are two questions here - HUL in terms of valuations and price - what is your call and what were the takeaways for the fast moving consumer goods (FMCG) space?
A: From valuation call the stocks way too expensive, so most of the foreign investors that we have spoken to find the entire FMCG space too expensive to put incremental money into work, in fact the stocks that we do like is Bata India which is surprisingly at 25-26 times forward earnings and quite cheap compared to HUL or ITC or Emami. However, having said that the extent of the rural slowdown that we notice from our rural India road trips is not as bad as the media was making out to be. We found anywhere from 18-22 percent growth in FMCG product sales in most of the towns and villages that we went to, which was quite shocking and surprising.
Sonia: What about Emami, Dabur India, Britannia Industries of the world?
A: They are too expensive and that's the problem. It's just valuations. If these guys come down, we would recommend buying and investors would look at them right now. Most of these stocks are more than 30x FY17 earnings and that\\'s too expensive.
Latha: Century Plyboards' numbers were 2 percent higher. Is this a reality check or is this a one quarter phenomenon?
A: It might be one quarter phenomenon. The real estate space in general is struggling across the country for sure but we do not cover the stock, so I haven't looked at the numbers but I suspect it is probably to do with the real estate sector being weak right now.
Latha: Is there anything else in the home improvement space that you like?
A: We like that space in general. I am thinking a lot about what else would work within the home improvement space. You have paints, the plywood business and of course tiles; we like the tile space.
Sonia: Sun Pharmaceutical Industries is making an attempt to rebound but not convincing one. What should a long-term investor do there?
A: I think most people were shocked with the extent of the fall yesterday and we would wait and we would not buy the stock yet because we need to see some more evidence at least another quarter of numbers from Sun Pharma.
Latha: What would the IT pack as a whole be in terms of weightage. There were lots of doubts raised that these guys are not redefining themselves for the digital and social media space?
A: I think the interest level before the Infosys results was weak in the IT space overall and people have been taken aback by the Infosys results and people want to see more evidence of a trend here before putting more money to work in the IT space. So, we haven't seen that much interest coming into buy Infosys or the other IT names specifically.
Sonia: You started off by saying that the risk reward is favourable for an investor in our market but you follow that up by saying that foreign investors prefer China over India. So from now until the end of the year or even for the next 12 months what kind of returns can an investor expect considering that we haven't seen any substantial improvement in earnings?
A: Before I answer that - the other factor to keep in mind is the domestic mutual fund industry and that continues to get money. Last month they collectively took Rs 10,000 crore, so that money, more than half of that is going to the midcap funds. So given that massive inflow that we are seeing into the domestic mutual fund industry, this market is going to continue to be pretty buoyant and in some sense India and China have something in common whether investor participation, whether its direct or through the mutual fund space is what is driving the market more than foreigners.
Latha: Finish the argument on earnings - what is the expectation and is the risk upside risk or is there a downside risk to the earnings expectation this year?
A: We believe FY17 is going to be the big year for earnings. It's not FY16. I think expectations are low and should remain low.
Latha: Low is what - high single digit?
A: High single digit yes, that's my definition of low.
Sonia: The telecom space has come into limelight with Bharti Airtel trying to sell some of its noncore assets, Idea Cellular doing well. Is this a space that will give meaningful returns?
A: I do not think so. We do not like the telecom space. I think once you see Jio launch, there will be consolidation in this space.
Latha: What about the inevitable auto ancillary space. You spoke about automobiles and the Maruti Suzuki showrooms and Ashok Leyland's thrust. Ancillaries - because so many have run up?
A: The thing is that valuations again, in some sense they have had a great run over the last 18 months and question is - is there much value left going forward. Therefore, they are too expensive and we are not comfortable pushing them from these levels.
Sonia: You would be bearish on Eicher Motors?
A: No we won't be bearish. I think it is a steady stock which is going to give you 15-20 percent; it's probably HDFC Bank of the two-wheeler space for sure, in some sense like Shree Cement, you won't get disappointed, it will make money.
Latha: Is HDFC Bank a buy?
A: Yes.
Latha: What in the finance space is a buy?
A: Everything else but the public sector undertaking (PSU) space. One of the interesting things I found from the trip to Singapore and Hong Kong was that there is some degree of scepticism creeping into non banking financial companies (NBFCs) space and a lot of people do not still think NBFCs are buying. Therefore, the preference remains the private sector banks and zero interest in the PSU banks.
Sonia: Even the smaller private sector banks disappointed the likes of Federal Bank, DCB?
A: No. I am talking of the top five-six private sector banks.
Latha: You are buying the private sector banks. Does the non-performing asset (NPA) issue worry you?
A: It does to some extent but the question is if you need exposure to India you need to invest in financials. If you need investment in financials then what is the best space to invest? It's the private sector banks.
Sonia: The biggest story this year by far has been the oil marketing companies (OMCs) and the gains we have seen over there. Would you think the risk reward is favourable to invest into the BPCL's of the world or has that story played out?
A: I think that story is not played out. The stocks have more than doubled. So the diesel deregulation story is over pretty much and that is really what moved the stocks. So, beyond that there is not much out there. I am not saying they are sells necessarily but I don’t see significant upside and that big move is already done and dusted.
Latha: You did say that even at these levels you would buy but is there a moving up of the bottom as well in India? Looks like ever since the crude prices once again started tumbling we have been receiving money from the FII counters as well. Has the bottom moved up?
A: I think the bottom has definitely moved up and don’t forget there is one major event coming up in January which is going to be the seventh pay commission money. Our estimates are USD 50 billion over the next two years that will be unleashed across about 50 million government employees both central and state. So, that is a staggering number and if you look at some of the stocks that moved after the sixth pay commission, I am not talking of six months because that happened back in May of 2008, that was really bad time, so some of that money is going to finds its way in two wheelers, the auto space.
Latha: So hold your breath for six months and there is demand coming?
A: Yes.
Sonia: You were telling us earlier on that you see quite a bit of traction for the market across the board but are there any spaces that you would completely stay away from now?
A: I think metals are still an area we don't recommend getting into. We don't like the telecom space as I already mentioned.
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