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Last Updated : Oct 25, 2016 07:45 PM IST | Source: CNBC-TV18

Earnings growth to be in mid-teens: Birla Sun Life AMC

Speaking to CNBC-TV18 Mahesh Patil of Birla Sun Life AMC said that a year down the line, one could look at much better outlook in earnings. "The past four quarters could see a decent earnings growth," he said adding that he doesn't see any reason for a re-rating from current levels.

Speaking to CNBC-TV18  Mahesh Patil of Birla Sun Life AMC said that a year down the line, one could look at much better outlook in earnings. "The past four quarters could see a decent earnings growth," he said adding that he doesn't see any reason for a re-rating from current levels.

He expects earnings growth to be in the mid-teens. The drivers, according to him, that will be key, are auto, privae sector banks, consumer durables, pharma, cement and media to some extent.

IT looks interest, he said. It is on his watchlist. He admits that long-term growth has come down. "We are at around 9-11 percent growth," he said.

There will be periods when the sector will do well and there could be some buybacks or payouts. There could be some tactical play, he said.

Below is the verbatim transcript of Mahesh Patil’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Latha: We would have begun with your Samvat picks or your Samvat sentiment but today we have to start with your Tata sentiment. Would you be shaken in terms of your holding in any of the group stocks?

A: Not really, as you mentioned earlier, most of the companies are professionally managed, they have an independent board and to that extent I don’t think it should matter too much. There could be some pause in terms of certain long-term strategies as you expect a new Chairman to take on board, so, there could be some pause in terms of the longer term plans. However, we don’t see any significant impact in any of these stocks.

Sonia: What is your view on the market, it has been stuck in a funk of sorts because we are devoid of any knee-jerk incremental good news, how are you placed?

A: The market is kind of in a consolidation phase. We have seen a lot of the things which needed to be happen, have really happened. So, if you look at, monsoons have been good, we have seen big reforms in the last six to nine months which you will see the benefits of that come through. Interest rate cuts also which we were expecting, I think bulk of it has happened. So, I think now it is for all that impact to flow through down to corporate India into the earnings and that is what market will look forward. Until then, I think it will remain kind of -- next one and a half months or so, I think until end of this calendar year, it could probably remain range bound.

We have some global events which market would want to wait out but clearly I think as the earnings trajectory starts to improve and second half looks to be pretty promising because the impact of all these things would really -- bulk of it will be felt in the second half and that is where the market would again start to gain momentum on the back of earnings and probably scale new highs as we move into the next calendar year.

Anuj: Would you bet on some of these corporate facing banks like ICICI Bank which is one of your top holdings which has started to do well, State Bank of India (SBI) has started to do well, would you back these stocks now incrementally?

A: The corporate banks, we have seen that in the recent past, Reserve Bank of India (RBI) also has given a lot of window in terms of kind of restructure some of the assets but more importantly the balance sheet deleveraging has started to kick in which is good. Some of the large corporates, they have struck some deals and in a position where we would see some ease of in terms of the total watch list which some of these banks have mentioned. So, while the earnings numbers might not really show a big improvement in the near term, that is something which we don’t expect in this fiscal year, but the incremental outlook in terms of asset quality will start to improve a bit.

Even somewhere down the line you could see some recoveries also on some of the NPAs which have been given. So, given that, looking at the broader macro outlook, I think we are slightly more constructive on the corporate banks. Obviously be selective over there looking at the valuations but the risk reward looks slightly favourable. We have always been slightly positive on the private sector banks, they have done well, we continue to like that but the marginal risk higher return over the next couple of years could be in some of these corporate banks.

Latha: All the assets that were sold were not NPAs, they were standard and very good performing assets, the only assets that gave any money to the leveraged groups. I have not seen too much evidence of the promoters making money on the family silver and putting that money into the NPAs, that has not happened. So, the NPA list again is that Rs 8 lakh crore of stress, it doesn’t seem to be going down. Therefore, up to what extent will you be wanting to bet on these corporate banks, is it just because they are debased valuations or will you be willing to back them a little more?

A: It is not just some of the promoters kind of deleveraging or selling the assets to take care of the immediate liquidity issues but I think it is more about a macro call also in terms of overall economy where we see that improving from here. So we have been slightly constructive on that. If you look at the specific sectors where there has been lot of stress, one is the metal space for example. In the metal sector also we have seen a significant stability in the metal prices. On the back of China demand, it has improved a bit and also some kind of a protection given to domestically to steel companies. So, I think you should see pretty good numbers from the metal names.

Obviously some of the large companies with huge debt, it won’t be sufficient but at least there is some kind of a better liquidity which you would see around. Other sector where larger pain was in the power sector for example, so, there again things have improved materially over there in terms of fuel availability. Even the power demand has picked up after the UDAY program, state electricity boards (SEBs) have started to buy a bit; not in a big way but marginally.

So, I think you should see some alleviation of stress across some of these sectors and cut in interest rate would also help. We have seen in fact in the last two to two and a half years, we have seen 250 basis points for the lowering of rates for AAA corporates and we further expect another 25-50 basis point kind of a rate cut. I think that would lead to kind of a cyclical upturn which we expect in some of these companies.

Sonia: Another sector that has been a good wealth generator this year is the auto space. So, names liked Eicher Motors, Tata Motors, even Maruti Suzuki, all up about 25-40 percent this year. Do you think that they can repeat that performance next year?

A: Auto sector, even last year if you look at, did pretty well in terms of the earnings growth. Despite lower volumes growth, probably because of the better margins and the benefit of commodity prices, we have seen decent growth even in FY16. FY17 also looks to be a good year in terms of the earnings growth. Volume pickup has been kind of, we haven’t seen it, still we are getting strong signals over there.

We are yet to await the festive months, the October month numbers are yet to be out but that will be a good indicator in terms of strength of the market revival. However, as I said, the urban pickup, we have seen some pickup over the rural demand if it picks up I think that should be good. Cut in interest rates would also help and by and large going forward I think even the goods and services tax (GST) should be slightly favourable in terms of bringing out the overall excise duty structure. So, there are a lot of good tailwinds for the sector which I think will favour the sector going forward.

The outperformance in the last one year or so, there has been a slightly P/E multiple rerating but that we have seen across the market. However, these companies have pretty good return ratios if you look at the operating cash flows. So, while they are not really consumer stocks, but in terms of return ratios, some of these companies are almost comparable with better volume growth expectations going forward. So, we continue to like the auto sector and even auto ancillary space.

Sonia: Coming back to the markets, you were telling us about earnings, so far what has your reading been of earnings season, it has been pretty lackluster if you look IT, telecom, some banks, etc but what is your view here on?

A: This quarter again would be slightly -- if you look at the first quarter numbers, probably it will be similar to that. So, we saw around 3-4 percent kind of a growth, the bottomline, I think similar numbers you would see. However, I think interestingly this time around you will see that the topline growth, probably because we have seen the nominal growth starting to  inch up now, I mean last year, revenues had grown so if you look at wholesale price index (WPI) last year, average at negative 2.5 percent, it is already now at 3.5 percent or so.

Looking at that number, I think you will see the nominal topline growth even this quarter, in fact in the last three quarters, it has been negative. If you look at for the Nifty companies, the sales growth has been in negative territory. We see a reversal of that trend in this quarter at least to come through. Overall numbers would still be similar to what we see in the first quarter, 3-4 percent kind of, not a big jump.

Latha: When the year runs out, what kind of returns can you expect from the Nifty and what would your incremental themes be for the next 12 months?
A: I think a year down the line probably while we again sit year down the line I think you would probably look at a much better kind of an outlook, at least the past four quarters would have seen a decent kind of earnings growth which has been lacking for the last three to four years I would say. Valuations, I don’t see any reason for market P/E multiples to really re-rate from these levels. They could happen if the liquidity continues to pour in but I think earnings growth is what I think the market should track over a one year timeframe.

So, I think a mid teens kind of a return is what I think one should expect over the next one year or so. The strong driver for that growth I think would be sectors like autos, private sector banks, consumer durables, media to some extent, pharmaceuticals, cement. So, these are some of the sectors where we expect the growth rate to be above the market average growth rate.

Anuj: These stocks have done well, they have been the leaders, what about IT which has slipped off a bit? Infosys is closer to 52 week lows, we have seen Tata Consultancy Services (TCS), the midcap IT, there are pockets which have  done well but in general the space has not done too well.

A: I think IT looks pretty interesting. It is there on our watch list as a contrarian but one has to still wait for some kind of signals because a) I think clearly the longer term growth rates have come down so we have seen IT as a sector in the last decade or so has structurally we have seen growth rates come down every three years by around 200 basis points or so. Currently we are meandering at around 9-11 percent in that range. So, that kind of a growth rate, I don’t think you will see long-term great value being created unless the growth rate picks up.

Obviously there will be periods where the sector would do well. If sector rotation happens, the valuations are very decent, some of these companies could also start, they have a huge amount of cash which is where free cash flows so you could see some buybacks or payouts over there because I don’t see any of them making large acquisitions, they haven’t done that. So, that could rerate, so, there could be a kind of a tactical play in that sector and considering that is underweight -- but unless the growth rates improve, I don’t see significant wealth creation in that sector from a medium to long-term perspective.

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First Published on Oct 25, 2016 09:50 am
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