The market has already garnered more than 35 percent returns this year, yet Jyotivardhan Jaipuria, head-Research, Bank of America Merrill Lynch is hopeful of positive returns in the coming year, though lower than 2014. He expects around 15 percent returns in 2015.
Speaking to CNBC-TV18, he says the government is likely to change its fiscal deficit target of 4.1 percent in its mid-year review of the economy on Friday.
According to him, the expenditure cut by finance minister Arun Jaitley signals a positive move and the first quarter of next year should see some big ticket divestments by the government.
Going ahead, Jaipuria expects 25 percent earnings growth in FY17. He expects earnings to double over the next four years. However, Q3 earnings for FY15 may fall below expectation due to sluggish demand and inventory losses by sudden fall in crude prices.
Among specific sectors, Jaipuria is neutral on the IT sector as he does not expect it to be an outperformer for the next couple of years. He is overweight on domestic plays like autos, cement and public sector banks.Below is verbatim transcript of the interview:
Q: What is your sense about the markets in 2015, since you are a long-term watcher? Do you think after putting on 30-35 percent weight we can do much in the coming year?
A: We still expect positive returns for 2015 but lower than what we have had this year because this year has been like a great year. So we will get around 15 percent returns for 2015, which would be very good.
Q: The government is leading on to a fairly fruitful winter session, the GST bill has at least cleared the Cabinet as a hurdle it has as a year and more to get all the states on board and even for that matter, the Rajya Sabha on board. Also, they seem to have made some tardy progress on things like insurance bill, the companies bill, do you think these incremental acts of the government can give the markets a much tidier rise in 2015? They are at it, would that be the interpretation of the market?
A: When we are positive on the market, we are looking at reforms moving ahead though not really at some big bang pace but reform moving ahead and government doing one-by-one some bills, which go ahead and help the whole recovery process.
The other thing is that you have margins, which are at 18-year lows, you have the economy which is at a low point, it will slowly start to recover because if we look at the big macro, your current account deficit stress, your inflation stress a lot of those stresses are going away. To that extent, at some point during the course of the year, it would start translating into better recovery coming through the economy.Q: The big cue for today will be the mid-year economic review that is expected to be around 12 o’clock. Do you expect any tweaking in the growth assumptions or even in the fiscal deficit target that has been led out for this year?
A: I don’t think they will change the fiscal deficit target which they have put at 4.1 percent even when the finance minister led it out, he said it would be a tough target; he is setting himself for the tough target to achieve.
There have been expenditure cuts announced over the last few weeks which indicate that he intends to meet the target.
The oil has provided some buffer. He has to meet his divestment targets so that is something which has been moving slowly but my guess is they will limp for it in Q1 of next year where they will do some big ticket companies and meet the target.
Q: What about earnings that haven’t quite bounced? Do you see that happening in Q3, when January numbers come in? Do we have to wait for it for Q4, what are the numbers you are working with for 2015 and for 2016?
A: We have a thesis that earnings will double over four years and it will be back-ended rather than front-ended. So we are not looking at FY15-FY16 being like the greatest years, it is probably FY17, which we think will be close to 25 percent growth. But in FY15 we are looking at around 15 percent earnings growth.
Third quarter is not going to be very good because two things will happen. One, there will be inventory losses for a lot of people. You have had these oil prices come down which will ultimately benefit a lot of companies but in the first part of it, you will face inventory losses. There are companies, which have come and guided lower in the last ten days, we seem to see such companies. So demand has not picked up, it has been weak and sluggish. To that extent, I don’t think it is going to be a great quarter. Even September quarter was not a great quarter. Aggregate earnings growth for the Sensex companies that are under 10 percent was the weakest in the last five quarters.
Q: You gave me the FY15 number, 15 percent earnings growth, FY17 you said 25 percent, what about FY16?
A: We are looking at something like 17 percent earnings growth for FY16.
_PAGEBREAK_Q: You are almost a veteran watcher of the petrochemical space as well the upstream, what is your take on crude? Invariably what comes to mind is crude and crude derivative companies, we look at oil companies, we look at tyre or some of the synthetic rubber users or paints; isn’t there an overall earnings uptick that can come from energy cheaper fuels?
A: Yes. Three months back nobody would have forecasted that we are going to USD 60 per barrel on crude so we should be happy the way it is. Hopefully, it continues somewhere around these levels and more than specific companies you just wait for the micro.
It takes away your fears of inflation, it takes away your fears of current account deficit and then provides some room for the Reserve Bank of India (RBI) to start cutting rates because if structurally crude remains low then you probably go down structurally on inflation.
The big thing is like we get interest rates coming back and interest rates probably are cut more aggressively than they would be if crude was USD 100 per barrel, which it used to trade a few weeks ago and so the gainers are whole set of companies, it just helps economic revival, it helps interest rate sensitive companies.
Apart from that there are few companies that use crude and are direct beneficiaries. There one has to see what the demand environment is because if demand environment is weak, we end up passing on a lot of the benefit you get from the raw material prices falling but if the demand environment is strong then they can keep that and make money.
Q: How do you read the conflicting commentary that we got from IT companies, TCS sounded cautious but on the other hand, Accenture went ahead and upped their FY15 guidance? What is the call on IT now and is there a case that TCS might underperform its peers, can the problem be TCS specific?
A: We are neutral on IT, we are not overweight, we are not underweight and the reason has been that the stocks don’t look very expensive. They have underperformed for the whole of this year. To that extent, there is some value in them. At the same time, we don’t think we are going to outperform the market in terms of their earnings growth.
You will love these stocks when they were much better, earnings growth in India was very weak, in an environment where we think earnings growth will pick up.
These companies will probably keep doing what they used to do in the past, they will keep growing at 15 percent but now there are lots of companies which used to grow much lower but will start growing more than 15 percent.
So we are neutral and then if the rupee is volatile, this is one place where people can get some exposure to the rupee and be a little safe but otherwise we don’t think it is going to be a great outperforming sector for the long period.
Q: You spoke about metal stocks not likely to have a great time for the next one year at least because of the Chinese slowing. That would affect all commodity stocks, the petrochemicals, anybody who is a resource processor?
A: We have been avoiding global commodities because of the fear in China - it is not just that China will not grow but they are trying to grow consumption rather than investment and so, they have the reverse problem of what we have.
They want to grow consumption and slowdown investment, we are trying to do the reverse. So that is the reason that if you are slowing down investment then all the drivers, which basically drove global commodity prices are going to slowdown.
Q: You are reasonably confident that the Nifty can put on weight next year, what would be the leaders?
A: We are looking at domestic companies, which will do well. So our overweights are auto companies that have done well this year. Also, we like banks.
The new thing is we have been positive on public sector bank this year which we typically have not been for many years. We are positive on cement. So these are three of our biggest overweight sectors.
Q: A lot of foreign brokerages still avoid PSU banks, why are you positive?
A: PSU banks for me are like a tactical play. There are two things; one, as economy recovers, PSU banks benefit in some sense more than the private sector banks because their NPLs are much worse than what the private sector banks are.
In the recovery you start seeing NPLs worry start to ease off and that is what will benefit the public sector banks. Second is, as interest rates get cut and bonds start to do well, the PSU banks typically are more exposed to bonds than the private sector banks are. So it is a play which is probably more tactical play.
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