IT, pharma and private banks have been 3 biggest disappointments: Anish Damania, IDFC Securities

In a chat with ET Now, Anish Damania, IDFC securities, says overall, a big income rebound is expected over the next four quarters and that should help in demand pickup. Edited excerpts


ET Now: After Q4 numbers there was a hope, there was assumption that the earnings trajectory had bottomed out and the expansion would be only on the upside so we may have bottomed out surely but in terms of growth and in terms of expansion, I think we are still a distance away?

Anish Damania: The cumulative which we have so far is about 29 companies in the Nifty for which we have just put out a note. Nifty earnings ex of financials is about 13% which is quite okay. If you were to include the financials then it is about 10% growth. Also the other factor which you need to look at is a sales growth now sales growth is about 11% for all these companies I think that is a strongest positive reflection which I have seen so far.

Mind you, these numbers are adjusted for treatment. So from that perspective, when I look at it, there is a bit of momentum while goinf forward. Also last year, in the first two quarters we are quite okay, it is the next two quarters, the second half two quarters which were very very poor especially led by banking so I think the banking woes still continue but they would be at a substantially lower ebb than what we saw in the last two quarters of FY16. I think results declared so far not a lot of optimism but I think we are not pessimist either. Also the ratio of downgrades to upgrades has started falling. Last year, in quarter four it was 1.7 times. Now it has come down to about 1.4 times so far. So we would still await as another 40% of the companies have yet to report numbers. But it looks that the direction is positive rather than negative.

ET Now: Just going through what has not worked out this quarter. While the IT disappointment wcame by coupled with Cognizant cutting its guidance yet again what to your mind have been the other big disappointments because there have been quite a few when it comes to banks and even pharma for instance?

Anish Damania: The only pharma result which has got declared so far in the Nifty is Dr Reddy and that had disappointed in a big way much more than what most people expected. Obviously IT has been a big disappointment in this quarter because Brexit was expected to do the damage more in the second half than probably in the first half but it seems that things have deteriorated fairly sharply in the month of June itself and this has caused IT to underperform. Almost all the top guys have not done well. Almost all of them and the other global majors are also following suit like Cognizant etc. This means this is an industry wide trend and if Brexit is supposed to have that impact of uncertainty, then it will fall in the next three quarters.

Also in the IT space, the first two quarters are probably the best quarters. So if these two quarters are showing a trend which is not that great, then IT is in for continuing disappointment.

I think a couple of banks in the private space also faced a little bit of a disappointment. Both Axis and ICICI Bank saw downgrades in earnings. So, that was also a disappointment but otherwise the earnings were more or less in line with some expectations.

ET Now: If I just look at the bright side, cement definitely stood out and the good part about cement earnings this time around according to me was that even the mid-cap and the small cap end of the cement names have delivered some very strong numbers, at least on the margin front. But, is it a space that people can still invest in considering that most people are saying the monsoon is good and until the season is over, volume dispatch numbers will not pick up?

Anish Damania: What I am looking at in cement is that over the last three years, volume for cement has been fairly muted and reasons are pretty well known. About 60-65% of cement demand is typically household led and if you look at over the last three four years, because of high inflation, high real estate prices etc, the demand for households and also a lot of stress on the rural income over the last two years has led to low demand from the housing side.

The numbers are quite evident, the household capex as a percentage of GDP has fallen from a peak of about 15% in 2010 to about 11% now. So it just tells you that housing demand is not picking up which is the bulk of the cement sales. But having said that, we have seen the entire slide, now all those factors which were impacting the household capex has started to improve, inflation is down for the last one, one and a half year, your real estate prices have been soft over the same timeframe and we are expecting income to improve on the urban side because of the OROP and because of the Seventh Pay Commission and a small buoyancy in the economy.

On the rural side, obviously the monsoons and things associated with that are going to help quite a lot. So overall, what I am seeing is a big income rebound over the next four quarters and that should help this side of the demand pickup and this side of the demand is actually more remunerative to the cement companies as the margins on the retail demand are far better than those which are more institutional driven so nearly 35% or 40% of cement sales are B2B and that was the portion which was growing and that portion had substantially lower margins in my view.

So if now we start seeing growth come back in the 60% of that demand which is more B2C, I would say that the margins for cement companies should improve and the profitability of cement companies should improve materially. And therefore the earnings forecast of most of the analysts could come true as the year goes by.

ET Now: It is not a very large is media but clearly that has stood out for you in terms in earnings, is it purely because of Zee or do you guys have coverage on the other media spaces as well, I mean, you know the companies like Dish TV, some of the multiplex companies which are on fire the last few days?

Anish Damania: We cover print, visual media, multiplexes and Dish TV etc. So what we have seen is actually a huge amount of outperformance both on the multiplex side as well as in some pockets on the print side and in the visual media. All of that is doing fairly well and if we expect incomes to move forward and economy to grow then I think media is going to be one of the largest beneficiaries of that move.

Therefore I have also re-included Zee TV back into my top pick list purely from the point of view that earnings trajectory is fairly decent now for them so despite the valuations which are a little bit on the higher side I would say that the earnings trajectory since it is becoming now better and more sustainable as we go by and we would say that the stock even if it does not rerate would still give a 15-20% appreciation.

ET Now: If I look at the current PE and I am looking at one year forward and depending on the estimate I follow, according to my estimates we are trading at about 17.5 times which means we are trading above the historical average. I still want to work with the assumption that the earnings trajectory will be strong but we may not be in a huge recovery.

If the assumption is that prices are expensive and the earnings recovery would be slow and it would be gradual, where is money to be made here because money would be made when you are able to predict a pocket of mispricing and in this market where everything is priced to perfection it is hard to find something which is underpriced?

Anish Damania: This has been the bone of contention since the last four years now. if you look at the last three to four years, cumulatively earnings of Nifty have grown by about 7% odd in last four years whereas the market has moved up about 64% odd.
So obviously there is an element which happened every year of this mismatch but we have also seen about 30 companies outperform the Nifty growth rate and the last, the 30th company has grown at double the growth rate of Nifty over the last four years.

So what I am trying to say is that there is a large pocket of companies which are growing significantly faster than the Nifty earnings and therefore those companies are getting rerated so sustainability of business earnings growth and quality of management has determined the valuations. And if you look at the composition of the Nifty then we are seeing more of those kind of companies which are forming a higher portion of the market cap and therefore the mean PE of the Nifty has gone up.

So just on an absolute basis if one were to look at this thing one would go wrong with the historical average but if you were to look at constituents and then start doing a bottom up approach rather than a top down Nifty valuation approach we will arrive at a much better conclusion.

So right now while we are at a target of about 8900 for March 2017 for which currently we are very near to that, we will closely watch how this quarter’s earnings go for us to see how we need to react on our target for the Nifty for the whole year.