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We expect earnings growth to be in mid-teens for AMCs: Pankaj Pandey – Economic Times


“From a commodity perspective, we are positive on two things. One, cement, because the benefit of lower coking coal prices or coal prices will start reflecting from Q2 onwards. Most of your tier I companies have reported very impressive volume growth, so that is one space which we are liking which should benefit from the overall commodity decline,” says Pankaj Pandey, Head Research, ICICIdirect.com.
Which side of the equation are you tilting towards? Are you a bull on asset management companies or a bear?
When we look at some of these ancillary or subsidiaries companies of banks, so our clear focus is largely towards banks because we have tried insurance companies, we have tried AMCs and also even credit card companies. The growth trajectory is still not very clear and so that is where the challenge lies. So, for example, in case of AMC, while the SIP inflows are good, we would expect earning growth to be in mid-teens and that should help the overall market to do well and eventually leading to better AUM for most of the AMCs.
But the challenges are still there in terms of regulatory, so which is why if you have to play, banks are a better bet. So, I will play it through HDFC Bank rather than playing it individually through HDFC AMC or HDFC Life. So, if I have to ride that opportunity, banks are offering a slightly better option compared to chasing individual names.Which is one commodity end of the market you are excited about — sugar, steel, tea?
From a commodity perspective, we are positive on two things. One, cement, because the benefit of lower coking coal prices or coal prices will start reflecting from Q2 onwards. Most of your tier I companies have reported very impressive volume growth, so that is one space which we are liking which should benefit from the overall commodity decline.

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The other is the autos because autos in general will benefit from that. Another segment which we like is the tile manufacturers. Volume growth is expected to be 12-13 odd percent. We have seen gas prices correcting and most of these players have yet to witness peak margins.

So, for example, Kajaria, the peak margin used to be about 20 odd percent. We are still looking at 16% kind of a margin in terms of numbers. Volume growth is good because Morbi players are largely exporting and not really dumping domestically, so price discipline is also better and overall real estate as a segment is also shaping up well. So, this is one space where we like both Kajaria as well as Somany Ceramics.

Divi’s, Aurobindo Pharma and Lupin, all of them are pharma but all of them represent different businesses. One is injectable, one is US generic and one is CRAMs. Which end of the pharmaceutical space is looking interesting?
When we look at traditional pharma exporters, so while for a company like Aurobindo Pharma, US contributes 46%, the specialty portfolio has done well for them. But even if you take into account all of that, you will see decent top line and bottom line growth. But the ROEs are still subdued at about 10 odd percent so which is why while it trades cheaper 10, 11, 12 times but we are not comfortable in terms of recommending.

What we like is more of CRAM or companies like Divi’s. So, while the gross margins have declined from 67% to 60%, but our sense is that in the subsequent quarters things are improving, companies are guiding for higher level of inquiries, so things are improving there and which is why Divi’s despite it trades at 10 times sales we are comfortable recommending that stock even at current levels.

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So, we are still not chasing US-based specialty exporters or generic exporters, so CRAMs still a lot more better space to be in. What about the other side, I mean, pure domestic companies, let us say Mankind or Cipla which gets a large play from domestic market. Do you like the India focussed pharma names in which ones?
What we like is Torrent Pharma because Torrent Pharma trades at nearly about 28-29 times, so a bit expensive, but a
good portion of the top line is coming from the domestic side, after a long period of time company is guiding for higher EBITDA margins and that will improve the ROCE and also our sense is that possibly could lead to better multiples.

So, while the stock has run up, but we still feel that this is one of the better stocks to look at on the domestic side because their productivity or various parameters when you look at they have been delivering far more better growth compared to a lot of other domestic oriented names.

What is the outlook for IT given the fact that the latest report from Jefferies indicates that there is a lot of caution among clients when it comes to Infosys, HCL Tech and Tech Mahindra which is what they have highlighted and that is leading to increased scrutiny on discretionary spends. Given the fact that there is a risk of renewals despite the strong deal pipeline, would you be circumspect on the IT space?
Valuations are definitely attractive in the tier I space. So, for example, Infosys is trading at 15% below their long-term average while the growth is still expected to be soft at about 6% to 8% odd kind of a constant currency growth, a lot will depend on how things pan out in the US in the subsequent quarter, so it is a good contra play to be looked at.
But when that upside will come it is very difficult to put a number to it because we are still looking at probability rate hikes in US.

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But I think tier II names, say for example, something like Newgen Software which has got a very balanced revenue profile and is comfortable delivering double-digit growth, it looks better.

Similarly, when you look at even the other tier II names be it Persistent or be it Coforge, these companies are comfortable guiding for decent double-digit growth, so that is the space we would look at. While we like them, but we do not know by when or how would be the trajectory going forward in terms of price performance.



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