Beside corporate banks, we have not seen any meaningful improvement in the earnings trajectory so far, said Gautam Duggad, Head – Research, Motilal Oswal Securities, in an interview with ETNOW.

Edited excerpts:

Any earnings that has positively surprised your own estimates?

Not yet. So far, the earnings season has been in line but the problem is about the future earnings revision which is still showing more downgrades than upgrades. Out of the companies which have reported numbers so far, the upgrades to downgrade ratio is pretty poor. We have seen 35-36 companies where earnings have been downgraded by more than 3%, only 20 companies have earnings upgraded. So clearly, the future direction of earnings is still showing downgrades.

More importantly, while earning season has been in line, the commentaries have been quite sombre. Whether it is auto or consumer, we are seeing very distinct weakness in commentaries of consumption-oriented companies which is a new development because till about last quarter, we have not heard such weaknesses in the demand commentaries of consumer companies. Those are the two highlights of this earning season so far.

Obviously, Nifty has shown around 3-4% kind of an earnings growth of corporate banks because the corporate banks numbers have been pretty good on operational front even as they missed their estimates but because the base is so low, if you include corporate banks, the numbers look very different. Beside corporate banks, we have not seen any meaningful improvement in the earnings trajectory so far.

I also wanted to pick on some of the individual earnings and taking a leaf from the entire consumption basket that you were mentioning, what do you do with names like a Jubilant? Look at their same store sales growth, clearly indicating that all the growth that is coming in the revenues incurred are only from the newer stores, because the SSG growth has come in at single digits?

Yes, you have to remember that the base is very high for Jubilant for this quarter. They had 26% growth on same store growth in the base quarter. Therefore, the expectations were also realigned. People were expecting 8% same store growth, they have delivered 6% which I would reckon is fine in this kind of an environment when other consumer companies like Godrej, Pidilite, Dabur or Jyoti for that matter have delivered very poor volume growth.

Secondly, on Jubilant itself, there has been a significant derating in the last one year. The stock is now trading at around Rs 42-43 on its own. It is not a cheap stock, but clearly where it used to trade two years back at 60-65 times, have come down to 40 times and going forward, the earnings expectations also not very inflated.

We are expecting around 17% earnings CAGR stock trades at 43-44 FY20 and 37% on FY21. We need to remain very cognisant of the fact that the same store growth trajectory can moderate from here as well but it has not deteriorated to the extent that other companies have. In the next two quarters, obviously they will again have the high same store growth base to contain. Therefore, you will see earnings normalising there. But the stock has seen an ample amount of derating, we still have neutral there.

Other discretionary stories also show the earnings have not been great. In fact, we have downgraded Asian Paints to sell. Yesterday, we have downgraded Pidilite to neutral and these stocks have had a tremendous run in the last three-four years. There can be a decent amount of time correction and the stocks typically do not fall 20-30% on price, but they do undergo a decent time correction. The time is right for time correction in some of the stocks.

You are fairly positive on IT. We have not seen any momentum in some of those IT names. Why is IT looking good to you?

In IT, our preference is towards top-tier companies. There are two-three factors which we find interesting about IT. It serves as a defensive in the portfolio when you know other defensives are crumbling. You have seen what has happened to pharma over the last three-four years and even now, earnings are getting revised downwards. So, that goes out of the defensive basket.

Consumer is a defensive. The valuations are not defensive right now. Most of them are trading at 30% to 40% premium to their own three year, five year averages. In that context, IT with a growth of 10%-12% does provide some defensible element in the portfolio and if election outcomes are adverse versus what the market is expecting, clearly there can be some impact on the currency. From that perspective, IT can serve as a good defensive component in the portfolio. Our preference is towards Infosys and Tech Mahindra within the tier one pack.

We still do not like many names in tier two barring one or two because tier two had seen a very strong run up till about June 18 and since they have been consolidating. Within IT, we clearly have a bias towards tier one and it is more a call on a defensives and valuations. Clearly they are returning cash to the shareholders. That does provide cushion to ROE and valuations.

What do you do with pharma because with news with respect to the legal tussle for these companies, it is going to pose as a big challenge if at all they are found guilty of hiking prices of these generics, even if they are not they are going to have to shell out a lot in terms of legal expenses. What does this news mean for the companies?

Yes, I agree it creates an additional overhang and uncertainty around this whole legal process and this can drag for a long time. Obviously company-specific impact will have to be evaluated but the fact remains that this sector has been up with one or the other problems — be it on compliance with FDA, pricing erosion in the US markets and now this additional problem about earnings revision, that has been singularly downward for almost all the top tier names in the last three years now.

If I can just highlight one data point, five years back the earnings pool of for pharma universe was at around Rs 17,000-odd-crore and even now it is at around Rs 18,500-19,000 crore. There has hardly been any earnings growth in this sector. Clearly ROEs have contracted for most of these names but the point is this is a sector where there is no universal trend and each stock has its own concerns as well as opportunity, you have to be very stock specific.

While top down, the sector does not look too good even now after so much of correction because earnings revisions is not yet showing a rest.


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