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Earnings to grow 20% compounded; bearish PSUs: Dron Capital

Corporate earnings will grow at an average compounded rate of 20 percent over the next three years, feels Pathik Gandotra, partner, Dron Capital. In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, he says the economy has turned though the pace of growth may not be as quick as the market has been expecting.

He says the earnings recovery so far has been mainly in operating margins as companies cut costs. But in the third and fourth quarters of this financial year, there will be a meaningful uptick in topline growth as the economy recovers.

Gandotra feels the market is reasonably priced at around 15 times estimated FY15 earnings and around 12 times FY16 earnings. He sees the market delivering around 15-20 percent returns over the next 12 months.

Gandotra is bullish on private banks and financial service firms, and bearish on PSU companies in general. He is upbeat on the auto sector, especially the commercial vehicle players, where he sees a dramatic turnaround in stock performance once demand picks up.

Below is the transcript of Pathik Gandotra’s interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy

Latha: What should be a trader’s view over here, should a trader now think of caution at all?

A: From a traders perspective the market has consolidated quite a bit over the past three-four months. If you look at most of the index stocks they have still not crossed the highs of May 16 like ICICI Bank, all the private banks, lot of stocks there. And there has been a big consolidation in that space so there is still lot of steam left even from here.

Latha: So you still trade long with stop losses?

A: Yes.

Sonia: The big space to watch today is oil marketing companies (OMCs) and with the fact that there will be no losses on diesel going ahead, would you still buy a stock like  BPCL at Rs 670?

A: With PSUs generally I am very circumspect, even the OMCs, state owned banks or anything because these policy change with time. Currently the fact that oil has come down and the government needs money to do some other program that is the reason why subsidy has come down to zero. I don’t imagine these companies will function like private companies going forward because there is just no history. In 10-15 years we have never seen that so it is difficult to imagine. It can be a big change if that happens that can be very big but will I bet on the fact that it will happen, certainly no.

Latha: What are your expected returns from the Sensex or the Nifty over the next 12 months?

A: If I give in percentage term, the index is currently quoting at 15-16 times ’15 and about 12-13 times ’16 assuming 15-20 percent growth in earnings. So, I think earnings will grow at 20 percent compounded in the next three years. There might be some delay in that, so we might have 15-18 and 25 kind of earnings trajectory. However, given that I would expect the index to compound 20 percent from here over the next three years and if that means next year, yes I think. You can get between 15-20 percent return on index 12 months from now.


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