Speaking to CNBC-TV18, Nandan Chakraborty of Axis Capital said the key metric to keep in mind is the price to earnings (PE) and not the earnings per share. He was referring to the earnings forecast in this fiscal year. He added that PE is the one to watch out for in a country. The EPS isn't affected by agriculture. In general food and crude will have to be in a sweet spot. If both their prices are low, then it is a problem for India, he said. PE takes a hit from bigger issues like Brexit and Rexit.He expects earnings growth of 14 percent in FY17 and 21 percent going forward in FY18 largely on the back of a strong economy.
He added that there have been greenshoots or pockets of growth that India has seen over the last year. Identifying pockets that could lead to growth, he ticks off interest rate sensitive stocks like HDFC Bank and Infosys as leading the charge. He also mentioned a few swing stocks like Tata Steel andONGC.
The first impact of monsoon is going to be on the price to earnings, he said, adding that an increase in farm income isn't going to happen. There will be a lag of 9 months for the farmers to see more money in their pockets, he said.
As major themes he tracks, he mentioned banking as a sector that will change the landscape of India "The biggest beneficiary of this will be small finance banks and losers will be midcap PSU banks."
On the Goods and Services Tax rollout, he flags a few issues. Rajya Sabha seats for the ruling government aren't enough, he says.
Below is the verbatim transcript of Nandan Chakraborty's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What is your sense now with the monsoon arriving as promised, are we in for an earnings upgrade. What are you working with in terms of FY17 earnings and is there an upside risk to them?
A: Two things peculiar about India that one must talk about. One is general and other is specific. The one which is general is that crude and food, these two have to be in a sweet spot for India to do well and both of these, for e.g. crude around USD 50-60/bbl, both of these, crude and food, if they are too low, in price it creates serious problems for India because crude creates war in the Middle East and sovereign flows come down and all that. When crude goes up, it is obvious what all happens.
Similarly for food, when food is too low in price, it creates a big social problem for India which affects the PE of the country, if not the earnings per share (EPS) directly because EPS directly is not really that much affected by agriculture but the PE definitely is. Similarly when food costs are too high then inflation bites and therefore interest rates cannot work. So that is one part to remember that we have a sweet spot. Second thing to remember related to it is macro is killing over for India and micro is going up for India. So there is a sweet spot. Macro, last year was one of the best that you could have had in every possible way; current account deficit (CAD), fiscal, inflation control etc. So that is killing off and we are prepared for that that's not a problem. We have enough forex reserves etc but the micro is looking up, for example in the previous quarter we had 9 percent year-on-year (YoY), ex-banking, growth and a lot of it was in auto, fuel, cargo and things like that. So there are green shoots. These are in general about India. However, specific to India and when you talk about FY17 and 18, given the composition of the Sensex and the EPS, 15 percent per annum is locked in for the next two years. Through the history of the Sensex, if you take 20 years span, it is not written in stone that you will have every five year period with an average growth of 15 percent - that is not true. So we had periods of low growth in Sensex EPS; let me first disabuse people of that notion. However, when you analyse the Sensex like we have done in recent strategy reports, you will find that there are two large banks which make the biggest amount of difference, most at risk, in terms of both FY17 and FY18. Otherwise we have a target of about 14 percent for next year and 21 percent for the year after that and that is FY18, which in-turn depends on 14 percent and this is after minus one percent of the previous year which was largely due to banking. So, I do not think the issue really is in EPS growth, it is in PE because you have a series of issues, Rexit, Brexit, monsoon, Fed etc, so there is a list of issues out there which you can hedge against but you cannot have strategy against. I think PE of the country is something that you watch out for other than the EPS growth. EPS growth is more or less locked in.Sonia: You said 14 percent earnings growth in FY17 and 21 percent in FY18. What are the pockets that could lead to that growth?
A: A lot of that growth will come from the interest rate sensitive. If you look at the Sensex, the one which has the largest weightage, so you have HDFC Bank which continues to go at 19-20 percent odd, Infosys will go up from 9 percent to 16 percent. So, it's a usual suspect, it's no big secret. It is in order of the weightage. Therefore, what makes a difference is Tata Steel, State Bank of India (SBI) etc which are the swings. Oil and Natural Gas (ONGC), Reliance Industries in FY18, these are the swings.
The way to look at the index is, roughly about 1/3rd is domestic, roughly 1/3rd is what is affected by the global scenes and 1/3rd is others. Others mean ITC and stuff like that.
Latha: Would you say that now we have to be little more discerning about the midcap stocks, with the rains arriving, is it throwing a lot of opportunities, the midcap space?
A: Yes, but one has to be careful because at any time, midcaps you always have to be careful about because the basket of midcaps does well or better than the basket of largecaps only under two conditions. One, when there is a gross domestic product (GDP) surprise and second, if there has been a huge underperformance in one versus the other, that's one thing, let's keep aside in terms of theory. In practice you cannot buy a basket of midcaps because they inherently smaller companies, you have to be very choosy about them, so that is theory.
However, let's get into practice about what you talked about monsoons. The first impact of monsoon is PE, not EPS, so that is first. Second, just because of monsoon, do not expect the agricultural sector in terms of farm income; immediately farmers to start buying lots of Maruti cars and two-wheeler and so forth. That is not going to happen for the next few months. You have a broken balance sheet of the last two years; you had three crop failures, so you are going to do that with a lag of about nine months. However, what is more important now because of monsoon is, one, all the interest rates plays. Therefore, what happens is the interest rate cut by this or the next Governor - that becomes a possibility because inflation is going up and that was a fear that maybe there will be no interest rate cuts this year.
The second is farm inputs. So, whatever is required, pesticides, fertilisers, tractors, pipes and stuffs like that, all that sort of stuff is on the midcap space, good for monsoons.
Sonia: Some of the new spaces that everyone seems to be interested in, logistics, defence, railways, solar, renewable energy, out of that whole pocket what looks like it would give most value now?
A: We just released a strategy report which talks about seven themes. I am not going to tell you in alphabetical order. In order of importance the first one is banking. The one which will change the landscape of India is banking. The biggest beneficiary of this will be the small finance banks and the largest private sector banks and the losers will be the midcap public sector undertaking (PSU) banks. Second, is all forms in terms of power emission whether it is power equipment or auto. So the emission norms are going to affect in both of them. The third in effect will be auto, agriculture and power equipment etc. goods and services tax (GST), I have put it, but Rajya Sabha seats are an issue. I know a lot of people are expecting GST. What deals will be done. I do not know but logistics is a play on double stacking of the dedicated freight corridor, not just on GST. So logistics is a play by itself in any case.
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