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Sept quarter earnings will be big movers here onwards: Sameer Narayan

After tax cut, earnings expectation of 25% for FY20 on Nifty earnings are back.

ET Now|
Updated: Sep 25, 2019, 10.59 AM IST
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Sameer Narayan2-1200
If earnings show green shoots, then confidence will be back and participation level should start going up, says Sameer Narayan, Market Expert. Excerpts from an interview with ETNOW.

Everybody is contemplating whether, this market will hit a new high and stay there or is the best behind us in the short term and markets will consolidate or fall? What is your view?
What happened last week was definitely tectonic.This was the hard bullet that nobody expected the government to bite! It was done so quickly, going even against the DTC recommendations of 25%, we have actually brought it down to 22%. So it is a great move.

Now, in the last three days, the so-called animal spirits were definitely unleashed. Today corporate India thinks that yes the government will act and the government is serious about ensuring that the economy is back on the growth track. So those are very big positives. But having said that, we do not see that there is a lot of commitment on part of the FIIs. Even in terms of recent stock movements, wherever the effective tax rate differential has been large, even within sectors like auto. For example, Eicher Motors was at 35% tax rate whereas M&M was at 25%. Therefore, the pronounced move that you have seen in the last three days in both these stocks has been very different

The market has clearly made a differential that once the tax rate has come down, it is for good and hence there has been stock-wise movements within sectors. Now does this lead to increase in capex? That is a function of what is my current capacity and the estimation of demand that I see here on. The monsoon has definitely been good. In fact, India has probably seen an excess monsoon for the first time after almost six years.

So even though the rainfall distribution may not be great and you may not get a very big kharif output, at least the outlook on rabi crop is positive and that is a big sentiment booster. But look at it this way. In July, after the first quarter numbers were out, everybody bought the earnings down to 8-10%; today because of that tax cut, you are back to the expectation of 25% for FY20 on Nifty earnings. That is why the market is back where it is. But from here onwards, the big mover is the September quarter is earnings. If somehow this shows green shoots, then confidence will be back and participation level should start going up.

Are you betting on the consumption theme then? Given that some of those factors will see a revival in growth, will that positively impact these companies?
Apart from consumption which is fairly well owned and well valued, the government is the big mover here. Today when you see the bills that were pending for long have started getting cleared, money is back into the system and orders are being given out. You will probably see the domestic cyclicals more in favour than perhaps consumption or FMCG. Apart from that, even where there has been a massive drawdown in terms of prices like in cases of PSU banks or where the tax rate was very high, those themes are likely to play out far better.

Are you betting on the consumption theme then or being positive on the outlook that given some of those factors we will see a revival in growth and that will positively impact these companies?
Apart from consumption, which is fairly well-owned and well-valued, the government is the big mover here. So today when you see the bills that were pending for long have been starting to get cleared, money is back into the system and orders are being given out, I think you will probably see the economy facing, the domestic cyclicals probably more in favour than perhaps the consumption or the FMCG and I think apart from that even where there has been a massive draw down in terms of prices like some of the state owned banks or where the tax rate was very high -- those themes are likely to play out far better.

We saw IT, pharma the defensive plays so to speak, completely lag when the markets were on fire. Yesterday they were back in play. What does one make of it?
Most of the tech space has been at 25% effective tax rate and to that extent, there will not be any immediate benefit because of the change in taxation. Also, they have not seen any upgrades and that is where the positive news is not forthcoming. Therefore, the optimism was not there on Friday and Monday. Yesterday, there were some sort of tempering and people realised a lot of catch-up has to be done.

In case of a demand revival, it is likely to show up in these sectors as well because IT is a large employment generator. The other thing that plays out is that tax cut will definitely give some sort of positive sentiment on a capex outline which is a larger long term decision for a corporate. The next thing that probably needs to be looked at in terms of a followup is personal tax reduction, which will lead to a direct demand stimulus.

If you do both of these, then there is likely to be some amount of fiscal strain and because of that, one should definitely hear some positive action on the divestment front. Since only a few months are left for the fiscal to get over, the space for piecemeal steps like CPSE ETF probably will not move the needle much. One needs to look at real strategic divestments to get in big money. In case the government moves on that, it will set the market on the right track.

Do you believe that one is safer sticking to private corporate names?
From here onwards, one has to look at the improvement in margins. Private banks have been fairly valued and so the asset improvement is likely to be visible in case the economy picks up in banks which have not been priced. Public sector banks would be a larger beneficiary of the incremental flow and the improvement in business due to a revival in economy.

Within consumption where is the opportunity to buy afresh? From Titan to D-Mart to Asian Paints, all are trading at exuberant valuations?
The incremental flow will perhaps be not that high. Bigger returns are likely to be made where ownership is low and the delta is likely to be bigger.

Why do you say that? Sometimes you need to buy simple compounding stories; over ownership, under ownership are important factors but they cannot be the only factor. Just because HDFC Bank is owned, why should you not buy it?
You have a point there. But HDFC Bank, Titan, all these are franchise companies. Now franchise value is a very different connotation from the classic valuations that an investor would look at. You can make a SIP on them on a monthly basis.. Even on an individual case, you can keep buying them and these will compound because demand will be there. They will be able to run an efficient business model and there will be returns for the investors to make.

But I thought the question was where will be the larger flow from here onwards for investors to look at in terms of allocating capital? I think one should make a case of allocation to these franchise companies which will continue on their growth path but don’t expect a large change in them because of the tax cut as perhaps in some other cases where the tax rates were far higher. That is the only limited point I am trying to make because the tax rate reduction is a profit opportunity that is available on a permanent ongoing basis for any corporate. That is where for a company with a 35% effective tax rate coming down to 25% effectively means a 10% secular earnings growth.

Which names would you pick up?
Coal India and Eicher Motors are companies where there is some element of franchise value and an element of competitiveness, a monopolistic situation and these are places where one is likely to see a good pick up in revenue if the sentiment and the economy pick up.

Will you buy BPCL with this view or for that matter any PSU, thinking that tomorrow will be better for these PSUs?
Our view on OMCs has always been good because they are fantastically run businesses, available at great value. These are also great assets for somebody to chase them. If BPCL and HPCL see the light of divestment some day, the amount of windfall they can unlock for the government is tremendous. Also, there would be a re-rating. For example, HP is available at 6 times EV EBITDA. These companies are fantastic cash machines. The petrol price deregulation mechanism is seamless. In the recent week also, the prices have been marked up appreciably. There is no reason for somebody not to go in for them especially when the entire auto sector, auto fuel retailing story in India is just about to be unleashed.

There is a strong chance of cash flow and appetite of investors for PSUs as a basket. The chances of a strategic divestment before the financial year runs out is far higher than what it was a month back. These are great stocks available at great value and a trigger of divestment also is a good tailwind. These can be prime stocks for long.

What is your view on Zee?
The business is in good shape. It is just that today there is a short-term overhang over how the promoters settle their debt and the stake sale and the discussions with the MFs etc. If there is clarity, the stock can perhaps retrace earlier levels because at Rs 30,000 crore, it is not a bad business in case the economy was to pick up from here.

Will you buy the Zee stock?
At this price, it is a fairly good risk reward equation.

How are you mapping the price? Why is it good, why is it bad? Just because this has fallen or you think it has become cheap? Their OTT platform, Zee5, is losing money.
Yes but the fact is it was not expected to make money from day one any way. When businesses and verticals are in investment mode, there is a certain amount of runway that is given them for them to play out in terms of accretion, content creation, etc. There is enough for us to give them some time and this overhang has perhaps seen a very disproportionate amount of price impact on the stock price. That is why I said that Rs 30,000 crore it is not a very bad risk reward equation given the fact that the business does not seem to have completely fallen off the cliff.

Also Read

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Not optimistic about earnings revival in FY21: Sameer Narayan

Sameer Narayan on what to do with Voda-Idea, YES Bank & PSU stocks

Beware of value traps in this market: Sameer Narayan

Sameer Narayan betting on OMCs, sugar and utilities for 15% return

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