Expect H2 earnings to be better than H1: Birla Sun Life

Sixty percent of earnings are in-line or mildly better than expectation, says Mahesh Patil of Birla Sun Life AMC. Going ahead, earnings in the second half of FY16 is likely to be better than the first half, he told CNBC-TV18. As far as the second quarter numbers are concerned, he says margin expansion has been the biggest positive in this earnings season.

Additionally, he does not see Bihar election outcome impacting the markets much. However, if there is any correction in the market post Bihar polls, investors should use it as a buying opportunity.

He is positive on domestic cyclicals. He also says there are early signs of a pick up in urban consumption.

Patil also adds government spending has picked up in the last few quarters, which will benefit road, railways and infra companies. Also, the expected reforms in the power sector are a big positive, but may not lead to a re-rating of the sector, he adds.Below is the verbatim transcript of Mahesh Patil's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: The market is now preoccupied with the exit poll numbers that will come out by 6o'clock today. What is your sense, if it is and National Democratic Alliance (NDA) victory, does it reset fundamentals? On the other hand if it isn’t, does that also reset fundamentals because the Central government will not only not get its expected majority in the Rajya Sabha, it also may become a little populist?A: Purely from a fundamental perspective, I don’t think the election is going to matter much. It is going to be mainly sentimental. Irrespective of whatever is the election outcome, post the election you should expect the government to work on its agenda. In terms of passing off a lot of bills, focus on execution -- that is most important.While big ticket reforms might get delayed if at all depending on the election outcome but that is not what is important at this point in time. What is required is execution on the ground level. We have seen the momentum has picked up a bit. We have seen government spending pick up and if that accelerates post the election, the government will focus on a few thing, there are couple of important bills which are there or reforms in the power sector, there is the bankruptcy bill which is going to be tabled in the parliament and if these things are taken ahead, that will be what market will look at for.Obviously if there is a disappointment over there, you could see a minor reaction but I won't be too worried about that.Sonia: If there is a minor knee-jerk reaction, in case of a disappointment, you would advise investors to use that as an opportunity to buy?A: Surely, I think clearly if you look at where the market stands as of today, on the global front, we are seeing things have normalised. The concerns in China are now behind us. We have seen even the trade in the emerging markets, which was played out in the early part of this calendar year, is kind of turning around now.On the domestic side, we have seen the earnings season go by which was kind of worse quarter I would say. So second half onwards you should see -- if nothing else -- at least on a year-on-year (Y-o-Y) basis things should look much better. So I think while we don’t expect any major turnaround in the earnings but looking at where the market is where the valuations are, any correction from these levels would be a good level for someone to accumulate at these levels.Latha: At your own end, this season you have more upgrades than downgrades?A: I would say upgrades and downgrades but overall if you look at the numbers, more than 60 percent of the earnings which have come in till now would either be in line or slightly better which is a good sign. I think a lot of surprise came in mainly at the margin level. We have seen a lot of companies, where the EBITDA margins have been better primarily because of the material cost, the commodity price fall has to the extent benefited the gross profit margin. So we will see going forward also the cut in interest rates which  would also translate down to the profit before tax (PBT) level. So I think we are yet to get some results from the PSU banks which will come in tomorrow. But that is not going to impact the overall earnings.Sonia: The space that everyone is watching today is the power space. We have all the stocks that are gaining quite a bit. Whether you talk about Tata Power, Adani Power, Rel Power, the cabinet will take up the distribuction companies (discom) resolution today and the power ministry is working on a proposal to deal with the stressed assets etc, is this a space that you like and should a long-term investor look at this?A: The power sector has gone through a lot of troubles. We have seen issues on the policy side, on the fuel supply side, some of those issues are getting addressed. Even on the fuel side, we have seen Coal India production has been pretty strong. Even imported coal prices have come down so if somebody is at the coastal level, he can also import. So that is not a challenge.The challenge has been in terms of the demand side. The off take from the state electricity boards (SEBs) because the SEB health hasn’t been that great, the finances were not in proper shape and we have seen a slowdown on the demand side or probably from the off take side. So if that is addressed in the SEB reforms and the discoms in terms of -- they are talking about restructuring package for some of these stressed state electricity boards, that should improve a scenario at least from the demand side.To that extent, some of the stock companies where they have got proper linkages in place, power purchase agreement is signed, they should stand to benefit a bit but we don’t see a big rerating in this sector. It is more of a kind of a value trade which one can look at. Obviously with interest rates going down, with cost of capital or cost of equity being lower, there is some kind of a valuation rerating which is there for some of these companies because it normally gets valued on a price to book multiple.Latha: We are almost at the end of the result season, we are probably 80 percent through, how are you likely to tweak your sectoral distribution?A: I don’t think there is any reason to change our stance. Our focus has been mainly on the domestic cyclical and there are two broad themes which we have been playing, one is the increase in government spending especially in areas like road, railways and other infrastructure, which will drive down for some of these construction companies and also to some other players.Broadly we believe that the urban consumption is something which is likely to pick up. There are some early signs of that which we have seen if you look at the commentary which was there for some of the companies. In the month of October we have seen the festive demand which was supposed to be weak, expectations has been slightly better.In fact the same store sales growth (SSSG) for some of the retailing companies has shown a good pick up over there and as we see that the real wage growth is positive, we are seeing the job data also urban side has shown an improvement. If you look at some of the job sides, so given these factors that is a theme which will play out. We obviously have the pay commission coming in in the second half of next calendar year. So these are the two broad themes which we think will play out. While the quarterly norms haven’t been too great for some of these companies, our belief is that they should play out in the next few quarters.Latha: Urban consumption and which other theme?A: Government spending related theme.Latha: The L&T numbers were not very positive in terms of Capital expenditure (CAPEX).A: L&T is not dependent on the government. L&T has got exposure in the oversees market, in fact 30-40 percent of the books in the oversees, where there is a slowdown over there, in the power sector we have not seen much of a uptick over there. While L&T is a broad, large infra, government spending is mainly focused in road, railways, so we could have looked at companies which are directly linked in terms of orders or indirectly it could benefit sectors like cement and other sectors.Sonia: But what do you do with a stock like L&T? Because the problem is that patience is now wearing out. Six months back there was an expectation of pickup in the CAPEX cycle that has not transpired, in fact L&T's order inflow has gone down 30 percent in this quarter and it is sitting at a 52 week low. You have that stock as a key holding in one of your portfolios, what does an investor do now?A: I would not talk specifically about L&T but broadly these companies are large leaders in a particular space. When we look at these companies, we look at from a slightly longer term perspective. So it is not like, agreed in the near term the odd inflows have not been that great in some of these names, but look at company's capabilities, if there is any large infra project which has to be built, these are one of the companies which would be the front runners for that. Also we expect a lot of orders to flow in, though that thing has materialized as of now in the defense sector, where there are few companies which have got capabilities really to do domestic, I mean the made in India theme which the government is talking about. So it is a slightly longer term view which we would take in some of these names, not necessarily in terms of the near six months or a year view. From that macro perspective if you take a three year view, we should see a lot of development happening in this space.Latha: How would 2016 pan out for the NIFTY itself? Do you think the growth numbers will look better, so should we expect a 10 percent a 20 percent rise at an index level?A: As I mentioned earlier, clearly we expect the second half of this fiscal year itself should be much better than what we have seen in the first half. If you look at the consensus number for this year after the downgrade has come down to around 11-12 percent. Though Bloomberg would show a slightly higher number, it has come down from 18 percent to 12 percent and the first half number is almost kind of flattish, so that means the second half has to be much better. But having said that, FY16 itself the earnings number, a lot of things will start to play in. This year we have seen at least the first nine months, a big disinflationary impact which has been there on the topline, so the topline growth has been negative, that should not continue I think, you should see that normalizing and margin improvement interest rates cut. So the earnings growth trajectory, I mean it is anybody’s guess, but I think there is a greater confidence that it should be somewhere around 15-20 percent, in that range. So with valuations near to long term average, the market should at least return in line with earnings growth. What has happened up till now is that every year we have seen that growth expectations have been there and it has been below, it is much lower. This year at least lot of things are in favour and we are seeing some early signs, so the probability of earnings coming through is much higher and the market should at least return in line with earnings growth.Sonia: In your infrastructure fund I was going through the holdings, you have a high percentage of holdings in the private banking space, so whether it is the ICICI Bank, HDFC Bank and even some of the smaller ones like Federal Bank, we have seen this whole onset of payment banks and small banks threaten the existence of some of these smaller private banks. Would you move out of these smaller names and get back into bigger names or do you still stick with these names like Federal Bank?A: Our strategy in the banking side has been to look at banks which have got not only a strong liability franchise which could be in terms of the Current Account Savings Account (CASA) ratio, the retail deposits, but also on the asset side, which are strong in a particular area, whether it is retail or any other niche players. So that is going to be key in terms of banks which are going to do well and should be also be able to Net interest margins (NIM). We see some pressure on NIMs for the banks because of the RBI regulation in terms of repricing the liabilities much earlier on the marginal deposits. The banks have got slightly better on the asset quality, the asset side flexibility in terms of pricing it much better, they should be able to sustain that.Latha: That is a loaded condition, strong in retail assets and retail liabilities, that is only one, HDFC Bank.A: This is the question of where the delta change is happening.Latha: There are some delta changes that you are noticing in some of the public sector banks which have not reported a worsening of their asset quality. So are PSU banks getting a look in from you? Because delta could be higher there.A: As you rightly said it should be the delta change and because the pricing spectrum varies a lot in the banking, where you have banks which are at 3.5 times book values, there are going to be others at around 0.7 times book value. So up till now we have been mainly in the private sector banks, we are looking at PSU banks but very selectively, because PSU banks you have to look at, the asset quality issue is still not really behind us, there is a lot of deleveraging which needs to happen in that sector and obviously it is important to even look at who is driving the bank, leadership is also very important. So selectively we are looking at some of the PSU banks.