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See 14-15% earnigns growth for FY16; disappointing Q4: MOS

Rajat Rajgarhia, MD-Institutional Equities, Motilal Oswal Securities expects disappointing fourth quarter numbers to bring down full year earnings growth for FY15 around 4-5% from the earlier expectations of 14-15%.

According to him in the last six months there have been headwinds coming in from almost all quarters – with collapse in commodities, cross currency pains, lack of pick up in investment cycle, slowdown in rural consumption etc, so capital goods  and cement companies are expected to report a decline in earnings. So the aggregate earnings growth for Q4 would be zero, while December was a negative number.

However, for FY16 some of these headwinds could stabilise and the base would turn favourable. Growth could be around 14-15% for FY16 but would back ended than front ended, says Rajgarhia.

Going forward, he expects September quarter to report better numbers.

Stock specific, he says the house is bullish on  Yes Bank and  IndusInd Bank and expects 25-30% earnings growth to continue for them over the next five years.

Below is the transcript of Rajat Rajgarhia’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Anuj: This Q4 is likely to be among the worst quarters that we have seen. Two part question, how much of the disappointment has already been priced in by the market and second, is this going to be a bottoming out quarter or can we expect things to become even worse in maybe Q1 or Q2 of FY16?

A: Last six months have been a classic Murphy Law as far as the earnings are concerned. Almost anything and everything that could have gone wrong has gone wrong with the numbers. You had a collapse in global commodities, you had cross currency, so all the exporters had a negative impact.

The domestic businesses did not pick up; investment cycle still remains slow, so typically March quarter which is one of the strong quarters for cement, capital goods – you will see companies reporting a decline.

Banks’ asset quality continues and we have some adjustment where this is a last quarter of restructuring loans. Plus rural consumption has also remained quite slow. So, almost from all quarters you have seen headwinds coming in and because of which this quarter we are expecting the aggregate earnings growth to be zero. It was a negative number in December quarter. So, March at zero may look better compared to December, it still remains a very disappointing quarter. So, that brings down the full year earnings growth for FY15 more closer to about 4-5 percent from what was expected to be about 14-15 percent six or seven months back.

From an FY16 point of view, generally you should expect that some of the headwinds that came in the last six months have now started seeing some stability, so you have favourable base and some of those numbers will look better. However, at this point of time a 14-15 percent kind of a growth is what investors are willing to realign for FY16. However, a good part of that growth will again be back-ended, not front-ended.

For the markets, a lot of the bad numbers are getting priced in. So, if you look at specific stocks be it financials, technology, capital goods – for many of the where numbers are expected to be bad, the stocks have been seeing shades of underperformance for the last couple of months. However, for this rally over the last 10 days, the Nifty itself was flat for the year.

So, markets have priced-in a lot of the bad numbers at least for the March quarter. June is of course not going to be any better but important thing is whether you get trends that September should be better for the universe.

Sonia: You mentioned that this quarter we will see zero growth for the Sensex universe. So in terms of individual sectors, which are the pockets that would concern you the most where earnings can be weakest this quarter?

A: The entire cyclicals whether it is global or domestic, right from metals to energy on the offshore front and capital goods to PSU banks on the domestic front, will report a negative growth into their earnings. Particularly when you see pockets like cement, where valuations are quite high and numbers have continued to see downgrade for the last couple of quarters, one just needs to be little more cautious there.

In case of global commodities, it is a difficult guess because prices there are very volatile and a lot more factors matter over there. We are more concerned about the domestic cyclicals because that is what investors come to India to buy for. As of now, cylicals like capital goods, cement and PSU banks are not showing any signs of improvement in their numbers.

Anuj: The sector that is expected to do the best albeit from a low base is telecom and you mentioned that in your report. How much of this has now been priced in with the kind of surge that we have seen in stocks like  Bharti Airtel and  Idea Cellular and how are you positioned on these stocks?

A: If you look at the telecom earnings, while the growth itself looks very high at more than 50 percent, the base numbers for these companies have been very low for a long period of time. However, more importantly, if you look at the aggregate profit for the March quarter for the companies in our universe, they will almost be at a four-year high in terms of their absolute profit.

A lot of the headwinds that had come into their numbers have started seeing some clarity. However, what has led to the performance into these names particularly, after the auction getting over, is the fact that people think with this event behind they can focus more on fundamentals. Whenever you pass through the events and you focus back on numbers, especially for under performing names, you will start seeing some realignment.

At this point of time, we still don’t think that we are going to see any material change in our earnings outlook. The street is only downgrading their estimates for the telecom. While we are a bit surprised by the kind of rally we have seen, you can always see pockets where stocks, after long periods of under performance, do have good performance just as a catch up game.


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