ET Markets
Stock Analysis, IPO, Mutual Funds, Bonds & More

Expect earnings growth from second half of FY18: Rajesh Kothari

Look at the India story from the next 12-24 months and that India story is going to be structurally positive.

ET Now|
Updated: May 29, 2017, 10.21 AM IST
 There will be short-term corrections, but market has headroom to go up
There will be short-term corrections, but market has headroom to go up
Talking to CEO, Rajesh Kothari, CIO, AlfAccurate Advisors, says hold on for longer term and there is significant wealth creation yet to happen.

Edited excerpts:

How would you explain last week’s price action? Nobody expected the markets to recover the way they did, 100 points plus on Thursday, almost a similar kind of a move on Friday as well?

This is a bull market and every correction will be used as a buying opportunity. We are extremely bullish on the Indian market over the next three to five years. Corrections in the short term cannot be ruled out but it is also important to keep in mind that over the last 15 days, although the Nifty or Sensex was remaining at same level, many stocks corrected by 5-20%. So, ideally one should look at the stocks rather than get mesmerised by the Sensex as such because there is a significant difference in underlying stock valuation as well as the underlying stocks earnings growth compared to the benchmark indices.

I would say do not judge the market by just the benchmark indices and even if you judge the market by benchmark indices, the valuations are still at around 10-11% premium to last 10 years’ average. It is not like we are at a 30% premium compared to 10 years’ average and we are overly expensive. Clearly, the market has a significant headroom even from now. In the short term. one cannot avoid the correction but hold it for longer term and I think there is significant wealth creation yet to happen.

Do you think there is a case for a correction in the near term and if so, how stark could it be?

The correction will always be sharp and healthy. If there is a sharp correction, then it gives base for the next big significant upmove. A correction can come any time but instead of having too much short term focus, let us look at the India story from the next 12-18-24 months down the line and that India story is going to be structurally positive compared to what India was two, three years back.

For example, if you look at the last eight years, the earnings has been growing at a compounded about 8-9% from FY2008-09 to FY 2016-17 and I think the next three years particularly from the second half of FY2018 onwards the earnings growth is going to be a significantly higher double digit story, maybe second half it can be 15-18% and then going forward probably in FY2019 as well it can be about 15-18% plus.

Earnings growth is going to be significantly better. It is going to be the probably the better balance sheet even for the PSU banking considering that government is acting very hard on NPA. The GST implementation by now would have happened and probably unorganised to organised process will start. There are multiple triggers for Indian market to move up, the Indian corporate earnings growth to move up. If you look at the Indian corporate capacity utilisation, right now we are close to around 68-69% capacity utilisation. As there is more order book, even that will improve going forward.

Capacity utilisation is low, earnings recovery should happen, demand should be there but I am afraid these were the data points which we were working with when we started FY16, not FY17. Everyone thought that the earnings recovery would be there but it is not there. It has been two long years and earnings are not there. We can endlessly talk about earnings recovery or admit that earnings recovery is not going to happen in an easy pace. Is it time to get realistic?

You are absolutely right and that is what exactly we are saying. We are saying that in the first half of FY18, one should not expect a very strong earnings growth but from the second half FY18 that will start. Please remember the puncture in earnings growth in FY17. There was a big event which happened called demonetisation. You need to keep that in mind. Coming back to your point, there are many companies which have reported very strong earnings growth. If you look at the last five years, close to 33% of BSE 500 companies reported the average net profit earnings compounded growth of 26%.

By no means is it a small number, it is a huge number and the market has rewarded those companies by delivering about 28% compounded market cap growth. We were just doing that exercise about a few weeks back. Similarly, there are many companies which reported flattish numbers or negative report and the market did not reward them either. What is important is where you are putting your money, what is your sectoral allocation. If you look at the early commentary from the largest passenger car player Maruti, it has been quite bullish.

If you look at Hindustan Lever commentary they are showing the early green shoots are already there. If you hear the conference call of Bajaj Finance they have been extremely bullish, they are saying the demonetisation effect is over.

Private sector banking are doing extremely well, NBFCs are doing well, cement companies earnings call have been quite positive, auto companies are doing reasonably well. Auto ancillary companies have also reported good numbers because of the global growth recovery.

There are pockets where things are doing extremely well. Look at the construction companies. You know three years back what was the revenue to order book and currently order book is running at close to three to four years’ revenue visibility. Clearly, there are some pockets which have issues. For example, public sector banking space where NPA issues are not yet sorted out, private sector capex is yet to improve. It is a process, it is a journey, you will not see everything green on day one, it takes its own time and I think we are in the right direction.

Also Read

Foreign companies will be taxed for money earned by Indian arms

Passive index funds earn investors' trust in 2019

More independent directors earn in crores now

China virus scare, disappointing earnings drive Wall St lower

IndiaMart rises 14% on strong Q3 earnings

Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links

Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service