Earnings growth to be next trigger for market: Birla Sun Life

The markets are now looking at earnings for way ahead, says Sashi Krishnan, CIO of Birla Sun Life Insurance. Worries over the monetary policy and new governor as well as reforms, especially the Goods & Services Tax (GST) are behind us now. “Q1 earnings suggest we are on track for 16-17 percent CAGR this year,” Krishnan says adding that revenue growth will also pick-up in coming quarters. Next leg of rally is expected to come from the consumption sector, which will benefit from the recovery in the economy. Birla Sun Life is also bullish on cement and oil & gas space. Pharmaceutical, which had been reeling under regulatory issues, is now seeing a turnaround. Views on pharma are changing to positive over long term, he says.Below is the transcript of Sashi Krishnan’s interview to Ekta Batra and Prashant Nair on CNBC-TV18.Ekta: Since we are talking about a couple of these pharmaceutical stocks, they seem to be the ones which are seeing the maximum profit booking today. Your sense, because they have not delivered in terms of numbers this quarter either?A: This quarter, both pharmaceuticals and IT have not delivered as per consensus but the longer term view on pharmaceuticals has changed to a lot more positive than it was two quarters back because some of the issues relating to Food and Drug Administration (FDA) approvals and the FDA observations seem to be behind us. So, from a long-term perspective, we have turned more positive on pharmaceuticals for the last quarter. There could be some bit of intermittent selling that happens in these stocks.Prashant: Are you sanguine about most of largecap pharmaceuticals as a sector or you think you have to get it right?A: We are selective about largecap pharmaceuticals. We are not sanguine across the entire sector.Prashant: The reason I am asking you is do you generally view the sector as a troubled sector and you have got to pick a winner because valuations have come off quite a bit or you think the opportunity is there for everyone? They all went through a tough phase and now they are all coming back up. Is it the former or the latter?A: Some people are coming back quicker than the others and that is where the opportunity is at this point of time. So, there are some stocks in the largecap pharmaceuticals where we are still a little cautious.Ekta: What is the next trigger for the markets? We have got the RBI Governor, we have got the goods and services tax (GST) already passed. So, your sense in terms of where the markets are going to focus now?A: Markets are going to focus on earnings. That is very clear. So, we have had a fair run up in the markets and obviously a question that many retail investors have been asking us, especially people who put money into insurance funds is have the markets run up enough for the year and do you think there will be a significant correction. Obviously, if you look at these two things, one is the reform process and the GST was the key reform that everybody was looking at and the uncertainty about how monetary policy would move over the next couple of months after the new governor came in and that is behind us.Therefore, markets will now concentrate on earnings. If you look at the first quarter earnings, in my opinion, first quarter earnings seem to suggest that we are clearly on track for a 16-17 percent earning compounded annual growth rate (CAGR) for this year because in spite of the fact that revenues have not moved up very much, if you look at broad market revenues have moved up by 3-4 percent, but earnings before interest, taxes, depreciation and amortisation (EBITDA) margins still remain fairly strong across most sectors and therefore, we are seeing both EBITDA and profit after tax (PAT) levels improving.Prashant: If you think about it, margins were last year’s story, FY16 story and this year because of wholesale price index (WPI) coming up, sales growth was supposed to pick up on margins because commodity prices are supposed to be depressed. The underlying has not changed. WPI is back in the green. Commodities are up so margins should go down. The point is sales are not picking up, you said 3 percent. So, why are you saying that Q1 suggests that earnings growth will be 16-17 percent.A: What I am trying to say is that this was exactly what the expectation that markets had was that the margin improvement was last year’s story. But we are seeing margin improvement continuing into this year also. I do believe that revenue growth will pick up over the next couple of quarters. So, with margins continuing to be strong and revenue growth picking up, we are on track to get to something like 16-17 percent earnings growth in 2016-2017.Ekta: The other space that I wanted to ask you about was the entire cement space. All of these stocks have seen a strong rally. Your sense in terms of whether there is any room left for an upside.A: Cement margins have been very strong in the last quarter. That also has surprised markets very positively. But the entire cement play obviously is a play on the beginning of the investment cycle reviving. When the investment cycle revives, I presume that it is the people at this end of the spectrum that starts performing very well. And given the fact that the government has committed to spend something like Rs 2.5 lakh crore, we are seeing business sentiment improving, we are seeing new projects start coming up. I still think that there is enough space in the cement sector and given that they are still not operating at complete capacity utilisation, I do think that the cement space will continue to do well for the next few quarters.Prashant: Which are your top picks, overweights, complete overweights now? Cement would be one of them?A: We do have cement, we do have the oil and gas space where we are very positive.Prashant: Oil marketing companies?A: Yes, the oil marketing companies where we have exposure and we have not started taking exposure to some of the consumption plays because we do believe that the next big rally in this market will come from the consumption space, discretionary consumption space.