See growth pick up from Q1CY16; bullish telecom: Axis Cap

He is bullish on pharma, telecom, auto and engineering sectors.

On the recent Cairn-Vedanta merger, he says both the companies are likely to be re-rated. He advises investors to buy Cairn India at current levels as valuations are attractive.

Below is the edited transcript of Nandan Chakraborty’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: We have got some fairly good numbers coming from the macros. The IIP number coming in at 4.1 percent, again expectations of 1 percent, March number revised higher, capital goods number coming with a bang at 11 percent and it is not even a one day wonder. We have had good numbers in capital goods for the last two or three months. All told, it presented a good picture; you buy it?

A: At a particular point in time there is one key driver of the Sensex and most other things are sort of discounted. At this point in time, the so-called poor earnings growth and the earnings downgrades are more or less discounted. At this point in time, according to prevailing sentiment PE is more important. Why? The economic growth in India at this point will not affect the EPS growth as much as it affects the Sensex PE; that is the basic reason.

I will give you an example, if I have FY16 figures, out of 74 percent of the Sensex EPS growth, I have 40 percent. So, out of the entire Sensex EPS growth almost a quarter is Tata Motors. Then I have Sun Pharma, followed by Reliance Industries and Oil and Natural Gas Corporation (ONGC). These have nothing to do with domestic factors.

If I look at FY17, it is a similar story but not as much. So, the point I am making is sentiments are extremely important. We had expected the real economic growth in India to come in the next calendar year rather than the previous calendar year. So, what are we looking at? The first quarter of the next calendar year is when we are actually going to see economic growth coming in. Therefore, the markets are going to pick up before that.

One, we are looking at a lag effect of interest rates which should come in by say September to December this year. The Reserve Bank of India (RBI) Governor has been misunderstood. He didn’t say he was ruling out interest rate cuts, he just said that he is going to wait and watch and see what happens to monsoons, what happens to the Fed rate hike which might happen by August-December, as people are now talking about it. That is one thing which is the lagged effect of interest rates.

Two, unlike previous years the government spend in April itself has been 9 percent year-on-year (YoY) this year. There has been a qualitative shift in that growth. It is more towards railways rather than social spend.

Three, if you look at the new announcement of projects that have started to pick-up and more important the accretion of stalled projects has been arrested. As a matter of fact, one of the key things that are happening now, is that the last leg of projects is being addressed while the first leg of projects still faced a problem. Now the first leg of the project unfortunately, will remain a problem till things are still cleared out. That depends on the recapitalisation of banks, the Land Acquisition Act and things that take a little bit of time. However, the last leg of projects is still being addressed.

The fourth good thing is the paper supply. There are quite a few paper supplies this year, they are not bunched up. So, they are being taken, over a period of time.

Finally, what I would say in terms of sentiment is that the things that the RBI has done like the strategic debt restructuring and so on, has given more fangs to the banks for them to negotiate better with promoters because even in CDR cases, the promoter will have to put in equity, otherwise his equity gets diluted, he loses his company effectively.

So, it is important to look at sentimental factors which will promise you the economic growth in the coming year ahead. Sometime over the next three to six months is the best time to invest because people will think of it in advance.

Sonia: We have been trying to gauge what the mood is on the ground when it comes to a pure pickup in earnings and on that subject the top-line or the revenues are just not growing for so many sectors whether it is FMCG, whether it is cap goods, whether it is autos. Do you think the worst of the slowdown in the top-line growth is over and when do you expect the real pickup to happen?

A: As I said we are looking at a real pickup to happen only in the first quarter of the next calendar year. For the reasons that I mentioned, it will take time for the top-line growth to actually start. However, you can’t time your market purchases depending on that.

Ultimately valuations are keen. So, if you look at valuations now, we are already fairly below the historical valuations. We are at 15.5 times FY16, 13 times odd FY17. You will tell me that it depends on the earnings growth that you have taken but as I have explained before, a lot of the earnings growth does not depend on the Indian economy.

Over the next six months would be a very good time to invest for projecting economic growth to happen in CY16.

Latha: What would you buy in FY16, the early birds that you can catch?

A: It depends on your time horizon. So, if picking from a sector like pharma which is almost a zoo, each animal is different, it is one of the sectors that we are overweight on and we have a range of both large-cap and mid-caps within the sector.

The other sector where a lot is happening is telecom, where you have a combination of tower companies as well as companies which have now almost faced a lot of the onslaught. We are expecting competition to come in by December with the Reliance Jio launch. So, I think telecom is another area.

If I were to forecast from amongst the operating leverage stories, there is auto and engineering. So, these are our four key overweight sectors. Downgrades will happen in cement, realty and PSU banks. So, these sort of areas earnings downgrade will happen but they are not a large part of the Sensex.

Latha: Here you mentioned private banks, did you?

A: No, I said PSU banks; there are going to be earnings downgraded.

Latha: What I mean in is would there be private banks in your buy list?

A: More or less neutral with slight overweight. I said auto, engineering, pharmaceuticals and telecom. So, private banks where there are only the top three to talk about, so in Axis Bank we have always had a neutral position because we are owned by them. In other two we are slightly overweight. So, overall we are overweight on private banks.