We can go back to 15 per cent earnings growth: Anup Maheshwari, DSP BlackRock

In a chat with ET Now, Anup Maheshwari, DSP BlackRock, says in six months from now, we will start focussing more on the earnings improvement rather than the earning downgrades and it is very possible to go back to 15 per cent type of earnings growth

ET Now: What is your view on the current market valuations? We have come up from that sub-7000 mark in the last two odd months. We are back at 7500 thereabouts. But are you comfortable with the current valuations?

Anup Maheshwari: The challenge is that valuations are not very homogenous at the moment as they have not been for the past many years. Some sectors are at the upper end of their valuation range and some which are at the lower end and that has really because of how divergent the entire cycle has been. So the breadth of valuations is actually at a very-very high level compared to the past and our sense is the same is the case with the underlying earnings trajectory. So as earnings start getting a little more homogenous, right now there is a big divergence in earnings across sectors, you have had a massive erosion in earnings from some banks as well as metal companies and that obviously reflects in very sub-optimal valuations for those sectors as well. So at the end of the day, valuations is a function of earnings. The earnings picture is still very mixed. As the year goes by, we will probably get a more sustainable earnings profile across all sectors. Once the base effect wears off, perhaps we will see more normalised valuations at that point in time. But on a stock by stock basis, there are lot of interesting valuation opportunities available even now.

ET Now: Cyclical cement is witnessing lot of action right now. What are your thoughts there?

Anup Maheshwari: There is a bit of an inclination to look at cyclicals that have obviously been at the lower end of their valuation range. Cement is not necessarily the best indication of a cyclical because we have seen that despite poor earnings, valuations have held up quite well in the cement sector. So these are not cyclical valuations that one would normally expect in a bad phase. But having said that, it is an interesting spot to keep an eye out for because at today’s point in time, cyclicals obviously are not being perceived well given the experience of the last seven-eight years. But they are called cyclicals because you do get cycles eventually and lot of these have very interesting risk reward pay off if you manage to sit through them for a fairly long period of time. So there are a lot of risks in cyclicals, mainly on the balance sheet side because of a slowing economy. But at the end of the day, that also will throw up enough opportunities. So you have so many cyclicals trading at such deep discounts to book value effectively reflecting the fact that these will be sub-optimal businesses for a long time into the future. That is where opportunities present themselves.

ET Now: What about pharmaceuticals? Do you see pain in the price because a lot of price damage has already happened although some say that multiples will compress even further?

Anup Maheshwari: Well the pharma sector is an interesting one. This is typical example of good business going through a bad time and that again tends to present normally good opportunities for long-term investor. The fact is the pharma sector has been one of the best performing long-term sectors not just in our market but in the world and to some extent these problems that they are facing right now are addressable so these are not going to be lasting problems. It may take a few years to resolve them but once they are, these companies will only come out better and stronger and with much better processes which are more acceptable. So to that extent, these sort of phases present an opportunity. It is a good sector if valuations do get damaged, it will be very good sector to look at actually.

ET Now: What about refining stocks? I mean they are in a good position right now but what is your view? Do you think them fundamentally?

Anup Maheshwari: So, in fact, in our portfolios we are actually overweight on the oil marketing companies, refining and marketing, the public sector companies particularly because we have seen significant shift in terms of their return on equity profile, the sort of earnings that they are delivering, clearly whatever the government has done in terms of allowing them to move away from the regulated pricing regime into an open market regime seems to be followed up. So we find this sector very interesting. The whole balance sheet structure has changed in the last three years. They have become much cleaner balance sheets. Valuations are still very cheap and it does present sort of value opportunity. The longer term one has to see, there are issues in terms of how they will allocate capital so it is not necessarily a huge long-term sector to buy and hold but at this point in time they are in a very interesting spot and definitely offering some good investment opportunities there.

ET Now: How are you positioned when it comes to midcaps considering they are the ones which are in leadership position now a days?

Anup Maheshwari: That is a separate category, I mean if you just look at valuations across the category, they are not cheap. But midcaps are all about bottom up investing really and there are enough businesses that you can find which are in their own business cycle, where there is some strong growth coming ahead and the market is not fully reflecting that. So we find enough ideas within midcaps that we like where the valuations are still fairly tolerable. As a category, there may be some general resistance to the entire range of midcaps. So we are not expecting them to re-rate as they have done in the last few years but you can always pick and choose names within that. So I think there is a fair amount of depth in the market in terms of ideas therefore there will always be such interesting opportunities and we are looking for those. There are lot of new listings also presenting themselves as good opportunities to invest into which we are looking at adding in the portfolio.

ET Now: So what is your view on Indian market outlook in this challenging global environment?

Anup Maheshwari: As long as we are in fairly benign earnings environment where profits are still struggling, it is quite likely that the markets will stay in a bit of range through that phase but as time passes and you see the cycle which had been showing negative effects of earnings from public sector banks, metals, capital goods which have actually been draining away earnings, changing over the next couple of years, it is quite logical to assume that we will see better markets. So there are global linkages but finally at the end of the day, the domestic earnings is really what we would like to focus on more because that is something that you can assess better and another four quarters down the road, we will have a fairly good low base in place.

ET Now: What is the base case when it comes to earnings growth for FY17 that you are pricing in?

Anup Maheshwari: It is going to be real struggle for anyone to answer that for the simple reason that a large part of the market which is banks it still not entirely clear in terms of how much of a clean-up will happen next year. Just like most people underestimated the amount in FY16, this clean-up process has started from December 2014 quarter onwards and it is likely to continue for another four quarters. But after that, by March 2017, even the RBI has indicated that it would like most of the banks to have recognised what they have to do under the asset quality review system. So to that extent, it is fair to say that by March 17, we have pretty much seen the worst of earnings and markets. It will start pricing the fact that those earnings have troughed out probably in advance. So from market standpoint, in the six-month timeframe from now, we will start focussing more on the earnings improvement rather than the earning downgrades. But can we get back to that 15 per cent type of earnings growth, I think it is very much possible.