There's scope for earnings-led recovery this year: Gautam Sinha Roy, VP-Fund Manager, Motilal Oswal AMC

In a chat with ET Now, Gautam Sinha Roy, VP-Fund Manager, Motilal Oswal AMC, says if commodity prices move up even slightly, their reported profits would move up much sharper. Edited excerpts

ET Now: What is the outlook for the capital goods sector as a whole? When it comes to earnings, is there anything that stands out? Has the government done enough?

Gautam Sinha Roy: You have to look beyond the largecaps. You have to look for plays on the road sector or the agri side where much of the capex going forward is focused or on even railways. But these will be very smaller cap names and not very liquid ones at that. Largecaps because of the high order book and incremental order flows, being weak are not be very positive essentially.

ET Now: We have been buying this theme for good over 18 months and somehow there has been only disappointment. We can argue that or wait for one more quarter but that one quarter wait is happening for the last four quarters?

Gautam Sinha Roy: Yes, that is true. But incrementally we are also getting the benefit of a lower base because if you see the last four quarters, earnings degrowth has been taking place and so at some point, the base itself will help. Also the government provisioning towards their rural part of the economy and also the central pay commission will drive GDP growth on the demand side. So while the uptick is still to be seen, there are reasons why you should be optimistic. Recovery on the demand side should be seen during the course of FY17 and my best guess is it has to be led by demand both on the rural as well as urban side as of now. Things are contingent upon monsoon standing up well too and we have to remember that on a PE basis also, we are at a slightly higher than long-term average which is not expensive given that the nature of the index has moved towards quality names. So if there is uptick in earnings, it can happen through the course of the year and the market will definitely react to that. There is a scope for earnings led recovery for the market this year.

ET Now: I am looking at your sectoral bets: OMCs, automobiles and select consumers. I want to discuss auto in greater detail. What have you made of the March auto sales numbers? It has been a pretty smooth ride from motown at least by and large and do you think that most of it is already facored in the price? What is the outlook?

Gautam Sinha Roy: We were positively surprised with the marked numbers but these are specific to the month being the year-end month for the auto numbers. But we do believe that for many of these names, demand growth should continue to be good be as it will be led by the MHCV cycle, led by central pay commission for the passenger vehicle side. For the rural side, it would be led probably more by monsoons, reverting after two consecutive disappointments. We have to remember that there is no history of three consecutive disappointing monsoons. So demand growth is the most important thing. Of course, no one can predict demand growth in the near term but the factors are building up well to suggest that demand growth would be good. Valuations in certain cases are expensive that is there we have to be careful. Wherever you see some price value arbitrage in autos, that is a sector one should be positive upon. In fact, yesterday only I was seeing that the 10-year CAGR for vehicle sales across categories be it passenger vehicles, CVs or two wheelers at below 10 per cent. It is single digits and in line with real GDP growth. That is largely because of what has happened since 2012 because 2012 was effectively the last year of growth. So there is a good chance that the bounce back will happen and that has to be led by fundamental factors like the Central Pay Commission or the increased allocations towards the rural sector in the budget and of course the monsoons too.

ET Now: 50 per cent of the earnings for the Nifty involving IT, pharma come from global factors. So 50 per cent of the earnings are actually global in nature given what is happening to exports, how rupee has appreciated against the dollar, pharma companies are in a disarray and commodities are yet to pick up I really worry about that 50%?

Gautam Sinha Roy: Yes, that is a good point. Out of the 50 per cent, around 33 per cent or around would be led by commodity prices. So for earnings, it is important to see where commodity prices move from here -- be it metals or coal. Ao if we do not see a further fall in commodity prices, that would add to a stability in earnings. So you have to have a situation where commodity prices are either flat or slightly upwards, which is the case that we are seeing now. In this situation, earnings get a major aid because we have a low base of last year and you have to remember that commodity companies are hugely leveraged to commodity prices. So if commodity prices move up even slightly, their reported profits would move up much sharper.

As for IT and pharma, in IT again, the base is nothing great we have already seen low growth in IT last year and so should be the case this year where it would be low but very dependable kind of growth. It would not completely disappoint and the rupee dollar equation will come into play. Pharma is a sector where regulatory challenges are making the entire numbers at a individual company level a bit of a hotchpotch and very difficult to ascertain on the near term. So overall sector for pharma might continue to do well as it has done in the past but the distribution of profit growth might shift from the larger ones to smaller ones or the opposite depending on who gets past the FDA hurdles the fastest. But overall, the sector should do well.