See Nifty earnings growth @ 8% in FY16, 20% in FY17: IIFL

The second quarter numbers have been mixed, but there are quite a few sectors — including some of the auto stocks, tech, media, private banks, among others — that have surprised on the upside, says Prabodh Agrawal of IIFL Institutional Equities.

However, he has sharply reduced this year's Nifty earnings estimate to 8 percent from 16-17 percent at the beginning of the year. According to him, recovery may now happen only in FY17, but there is a lot of scepticism on that too. He is forecasting a 20 percent earnings growth in FY17. But there is a lot of disbelief on the number, he told CNBC-TV18.

On Thursday's power sector reforms, he believes it is a step in the right direction, since the sector is in a bad shape. So much so that State Electricity Boards (SEBs) are resorting to load shedding instead of buying additional power, he explains. However, execution is key now, he adds.Below is the verbatim transcript of Prabodh Agrawal's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: It has been all about earnings so far and the earnings have been weaker than what the street was estimating. Do you expect more downgrades to flow in now?A: I would say the Q2 result season has begun on a mixed note. I wouldn’t say it is a disaster, it is a mix set of numbers.Just to share a few numbers with you, IIFL covers about 185 companies and these are of course largely the largecap and the midcap names. Half of the companies have declared the results so far. 40 percent of the companies that have declared results so far have reported better than expected numbers. 40 percent are below and about 20 percent are in line with our expectations. So it is quite a mix set of numbers.More importantly, if you look at the sectors which have surprised on the upside that includes a wide range of industry. It includes of course private banks, non-banking financial companies (NBFCs), some of the infrastructure companies, auto companies, technology companies, media companies, refining companies. So it is a positive surprise on a wide range of industries.We have been cutting earnings for the last five months. In the beginning of this financial year, we were forecasting an earnings growth of 16-17 percent for Nifty. That correctly stands at about 8 percent. So we have sharply cut down the earnings estimate for the current year. Whatever recovery that we were expecting in the current year has not materialised so far and now the expectation is that probably the recovery is going to happen in FY17. So rightly because we have been cutting numbers, the market is very sceptical, investors are still sceptical and we do not have a clear handle whether the recovery will be as strong as we are expecting in FY17.I think there are signs of recovery as sceptic may choose to ignore these, more optimistic person would say that there are enough signs for the ground to suggest that things are improving and in the next two-three quarters, these recoveries will show us stronger trend.Latha: How much have you cut your earnings by for those 180 companies?A: We have cut our earnings from 16-17 percent in the beginning of the year. Now it is down to 8 percent. So that is the extent of the earnings cut that we have done. For FY17, we are forecasting about 20 percent earnings growth. There is a lot of disbelief in the FY17 number. However, as I said, the base has been low. We have had 5-6 years of weak set of numbers, earnings growth has been in high single digit or low double digit and therefore the recovery whenever that comes would allow very high growth. I am not just talking about one year of recovery but we are talking about multiyear of high teen or more than 20 percent kind of earnings growth.Sonia: What about the power reforms that were announced yesterday, did that enthuse you in anyway?A: This is the step in the right direction. This was required. We know that the power sector is in a very bad shape. The plant load factor (PLF) of the existing thermal power units is currently at 60 percent which is an all time low. The state electricity boards (SEBs) are resorting to load shedding instead of buying power and supplying to people. So this situation cannot last and the government's promise of 24/7 power by 2022 is definitely not achievable. So of course, this is the right step in the right direction but what we have got to see is the execution part.Why there is still a bit of scepticism in the entire investment community is because of what happened to FRP I in 2012. There were very few takers for that and while we expected the transmission and distribution (T&D) losses to come down, we expected the tariffs to go up but that did not happen and the losses kept on mounting.Now this is FRP II, again the actual execution whether the states are serious about bringing down the T&D losses, about raising prices and meeting the 2019 target of eliminating all the losses -- so we will see, many of these states are ruled by the ruling Bharatiya Janata Party (BJP). Therefore I would think that this time there should be much more support and much more coordination between the centre and the state to implement this package.Latha: You heard what Ravi Gupta of Jubilant Foodworks has been saying. He is also speaking about the wage inflation in urban areas. What is the sense, is urban consumption here, is that part of your portfolio, part of your incremental portfolio?A: Of course we know that the consumption has been weak for a while especially the rural consumption which is not surprising given that we have had two successive poor monsoons.Having said that, there are pockets of recovery in consumption, for example passenger car sales have been recovering, they are in mid-single digits. Commercial vehicle sales have been very strong. That probably shows a pick up in the mining and the industrial activity.Your mobile data revenue is growing very strongly. Your advertising revenue especially the television advertising revenue is growing very strongly, office absorption is up 20 percent year-on-year (Y-o-Y) and it is going to be up 70 percent over 2013 levels. Toll road collections which is a combination of passenger traffic movement as well as goods traffic movement is up some 14-15 percent Y-o-Y. Tax collections have been buoyant, these are some indications. Some of these are consumption driven, some of these are industrial driven, but I see that these are the early signs of recovery and of course the input prices have fallen which is also helping the consumption demand.Across the fast moving consumer goods (FMCG) segment or across the consumer discretionary segment, we have seen a sharp decline in input prices and that has resulted in higher gross profit margin (GPM) for many of these companies. So that should lead to better consumption recovery. Interest rates have come off very sharply in the last six months.Sonia: There has been no recovery in the public sector undertaking (PSU) banks just yet and we are getting some very disappointing numbers from the likes of Bank of Baroda (BoB). Does that make private banks a little more attractive or now would you even start to worry about certain asset quality chinks there too, the likes of Axis Bank etc?A: The asset quality issues in PSU banks have persisted for a very long time and I don’t think we have seen the worst of it. I would think that there are still a lot of problematic assets, which are yet to be recognized as NPA or restructured loans. So I think this problem will continue for a while.Of course not all private banks are clean. Some of the largest private banks also have their fair share of such stressed loans, which have very large exposure to the infrastructure segments especially the power and the metal segment. So they will also have similar problem. That is reflected in the valuations and the performance of these banks.However, private banks which are focused largely on the retail side will continue to do well. I see very strong loan growth significantly higher than the sector average, strong fee income growth, reasonable provision charges and therefore net profit growing at anywhere between 20 percent and 30 percent.So overall we still remain very positive on the entire private bank and the NBFC space.