In an interview to CNBC-TV18, Gandotra spoke on what stocks/sectors may outperform in a market that he says will do well and his outlook for earnings across the board.
Below is a transcript of the interview. Also watch the video.
Q: What did you do after this earnings season? Some of your peers have not really come out thumping the table after this earnings season. Were you convinced?
A: The earnings season went broadly on line with what we thought. We did not expect great earnings to come through this quarter in terms of year-on-year (YoY) numbers. But we expected earnings to improve sequentially and they have. They have improved 5% sequentially although Sensex earnings are down 14% YoY and our universe earnings, excluding the oil-marketing companies, are down by 3%. Including the oil marketing companies, they have gone up 30%. But that was more or less in line with expectations.
We have been consistently saying that we expect the economy to revive and the market to be in a bullish phase. We stick to our target of 20,000 over a nine- to 12-month horizon.
Q: What is your earnings per share (EPS) target both for this year and the coming year on the Sensex companies put toegether?
A: The EPS target is Rs 800 for this year and Rs 1,032 for next year.
Q: Do you believe that there will be significant upgrades going forward or after looking at this quarter you are becoming a little more cautious in the expectation that there will be serial upgrades running through the next four quarters?
A: I am absolutely convinced that from hereon, every single quarter, the earnings will get upgraded because the pace of the economic expansion is something, which the analyst community, including my own, is not estimating.
Obviously, analysts would look at the sectors in more details. So as the macro things fall into place, it will lead them to upgrade.
So the upgrade cycle is firmly in place. I would tend to think that earnings upgrade across sectors like autos, cement, across capital goods and even metals from next year onwards, which would see earnings to be substantially higher than what our current estimates are.
Q: For this Rs 800 EPS – what are you predicating for the second half (H2) of the financial year by way of earnings growth?
Q: And which sectors lead that 46%?
A: It’s auto, metals, banks, IT services — all will do very well in earnings for H2. What our thesis here is that you will see six-quarters at the minimum of 20% plus growth in the index earnings, every single quarter. Which is why I think in the face of such a massive earnings expansion that is waiting to happen, it is highly unlikely that the market will not do well.
That is why I think you will reach peak earnings next year. When you were looking at index of 22,000 in January 2008, everybody believed that earnings of FY09 would be in the regions of Rs 1,100 or Rs 1,050. I think that is where the earnings are coming to for next year as well.
Q: What is it from banks that are your strongest overweight now, because you have indicated that that will lead the market to higher levels?
A: We like the whole host of PSU and private banks. I think PSU banks will do well from hereon because I don’t think bond yields are going to go up significantly till at least January-February and credit growth will revive and credit costs will be contained because asset quality pressures have eased. So if we put all these three together, combined with lower valuations PSU banks should do over the next quarter.
Private Banks are longer-term structural stories where we think significant gains in market share will start happening from next year onwards. So our top picks in banks today are ICICI Bank, Axis Bank and State Bank of India.
Q: An interesting non index pick that you have is Jet Airways. What is the story there?
A: It is all about incrementalism. I think incrementally things are improving for Jet Airways. We think that with traffic improving, with the fact that load factors are going up and with the fact that a bulk of their business is international, which is also significantly higher load factors, I think the stock should do well.
Secondly, if you look at stocks, which have been gone through debt stress, if one looks at the biggest out performers in this year — people who have been under debt stress and when the debt stress goes away is when the maximum returns come, which is what I believe will happen in Jet Airways as well.
Q: To go back to banking, you also seem to like smaller names like Yes Bank, IndusInd Bank even Shriram Transport Finance. What attracts you at the lower end of the financial spectrum?
A: All these three companies have the ability to significantly expand their market share from where it is today. Each of them has a different story. IndusInd Bank is under new management team and is all set to grow its market share very profitably. If one looks at their numbers that have panned out last four-five quarters, they have been amazing, the bank is growing more than 100% every quarter and its growing profitably as well.
Yes Bank is a franchise which has been through rough times in the last year but has come out of that very amicably. Given the fact that their capital adequacy has improved without them raising capital because the credit quality of portfolio has been extremely good and so Yes Bank is now all set to rollout its retail strategy going forward and on the back of that we see significant market share expansion as well and so we are very positive on Yes Bank.
Shriram Transport is one of its kind of company. It is into second hand truck financing where there is no competition whatsoever, competitors have come and gone but the franchise remains very strong and now with the uptick that we see in the commercial vehicle (CV) cycle coming forward, I think the business their will go up very significantly.
Q: One of our re-rating triggers for the market in calendar year 2010 is what happens on the GST front, any preliminary takeaways on what was released yesterday and which sectors may then stand to benefit?
A: We are still doing our work there and so I reserve my comments there. But my big point is that as long as they get the GST rolling in a comprehensive fashion, I think we should be good.
Q: What about PSU disinvestment?
A: Here we clearly see traction, at least the government is talking; if you hear from the investment banking circles, people are already making visits to the government to figure out and I think there is some action happening there. So I think there will be serious effort by the government to disinvest next year which will alleviate the fiscal deficit which is what will keep bond yields low.
Q: In your 20,000 Sensex target you seem to favour many of the high beta sectors like real estate, metals, is it because balance sheet repair has happened or you believe in earnings acceleration for those sectors?
A: The first phase of the rally, in both the sectors was because balance sheet repair had happened. In the second phase I think there will be earnings acceleration. I think real estate companies would have hopefully learnt from their past mistakes and would not go around and buy land funding it from short-term sources and so if they actually start developing properties where we think huge under utilization or under penetration, we think that sector will stand to benefit
On metals our view is that global prices will eventually start moving up, I cannot say that across all metals but on aluminium we are very bullish.
Source : CNBC-TV18
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