Expect earnings to grow 15-16% in FY17: Mayuresh Joshi, Angel Broking

In a chat with ET Now, Mayuresh Joshi, Fund Manager, Angel Broking, says will pursue OMC as theme from a medium-term perspective.

ET Now: Not a bad day, we are at 7900. Do you believe that from here on we are going to build on those gains? What, accoring to you are the key factors that investors should be looking out for in the short term?

Mayuresh Joshi: We believe everything point to revival in corporate earnings. What happens with the capex cycle, what happens with the reform processes and policies and again better monsoon expectations, rural discretionary income and spending should go higher. Again the markets are trying to factor in a lot of these things. Again, the markets are largely looking at corporate earnings not reviving at least till the second half of this fiscal along with the capex cycle. So, government spending is extremely crucial. If private capex follows the government capex, I think we will expect corporate earnings to grow at a decent pace in FY17 at around 15-16 per cent because expectations of nominal GDP growth are around 12 per cent. So, revival in earnings along with pick up in capex cycle are going to be structural themes for a re-rating in the Indian markets. But till that point of time, the markets will consolidate at the current levels.

ET Now: Let us talk about the other factor. What is happening as far as oil prices are concerned? After pretty decent upmove in the last couple of weeks, today you are seeing them getting wiped out. This is not surprising, given that the market had hoped that we will hear something over the weekend. Given what oil prices are doing in the short-term, where do you see prices headed and in that light, would you be betting on any of the OMC companies?

Mayuresh Joshi: Again, oil prices are largely expected to be extremely volatile and whatever happens with OPEC meet, the production supply caps, all these factors will keep on playing in terms of how the crude movement might be from the short-term perspective. However, if you take a medium to longer term perspective, our own take is that you really expect a range of oil to play around. The OMCs have largely factored the gains that have come through in terms of falling crude prices which have resulted positively in terms of the debt levels going down. Their working capital constraints have eased off. But largely going forward, it is going to be how marketing margins improve and a lot of managements specifically on the downstream companies have improved their marketing margins. So clearly it is going to be how volumes drive through. GRMs are expected to be a bit soft this quarter because of weak cracks that we have seen in naphtha and kerosene but largely numbers should be much better for the OMC pack this time around as well. Stable numbers are expected and management commentary is expected to be stable as well. So I think OMC as theme is something that I shall be pursuing from a medium-term perspective. In the short-term, the oil price movements will gyrate and will have a bearing in terms of how the stock prices move but largely from medium to long term perspective, OMCs look like a very reasonable bet in terms of improvement in marketing margins, reflecting positively on their earnings.

ET Now: It is amazing to see how MindTree ahead of its numbers is holding out so strongly. While Infy is in earnings reaction, MindTree is just in anticipation of the numbers. What to your mind could one expect from some of these midcap IT names?

Mayuresh Joshi: Largely they have outperformed in terms of the niche businesses doing extremely well and again in terms of performance on quarter on quarter basis, most of the companies should reasonably hold up in terms of dollar revenue growth. The EBIT margins largely should hold up for a lot of these companies as well. So you have to take stock by stock or company by company approach when you are looking at the midcap IT companies. The valuations probably have become a little bit stretched at this point of time so one really needs to be extremely selective when you are talking about the midcap pack.

ET Now: The fact remains that today’s rally is largely fuelled by what you have seen Infosys and perhaps the other IT companies do. Banks have been left out. You are seeing a fair amount of pressure and the Bank Nifty has managed to recover from the day’s lows. But you are seeing a lot of pressure. Do you suspect that as we see more and more fourth quarter earnings coming in, it is not going to paint a very rosy picture for banks? And if yes, then by when do you expect we are going to see at least some signs of a turnaround on some of these banks report cards?

Mayuresh Joshi: If you go by the management commentaries, the markets are not expecting any recovery happening in terms of how the book will pan out for a lot of these banks specifically on the PSU part and on the private side, banks having exposure towards the corporate and the SME book. So clearly, the hit in terms of how the asset quality will pan out is going to be very painful for a whole host of these banks, not just in Q4 but my own expectation is that even Q1 might be a little bit painful. Now it is hope and recovery that one really expects these banks balance sheets to play out for the greater part of FY17 and again the two large themes that we are basically working out if you really see a cyclical improvement happening in terms of both your capex cycle recovering as well as earnings bottoming out, you might expect the credit growth to start picking up. With falling interest rates, transmission coming through the cost of funds for whole host of these banks specifically having a retail focus should improve and that should have a positive impact in terms of how the NIMs pan out. So I think there is going to be more story in the second half about how credit growth picks up, how asset quality gets curtailed or sterilised at the current level, giving a boost to their earnings in FY17 and consequently I think the return ratios both in terms of return on assets and return on equity should improve. So yes I think larger private sector banks having retail exposure is something we continue to like, among the PSU banks the larger PSU banks having decent capital adequacy and having a decent tier I ratio is something which will fuel their balance sheet expansion in progressive times going ahead.