Raamdeo Agrawal of Motilal Oswal Securities believes that the market is fairly valued at the moment. He does not expect any slowdown in corporate earnings for FY06-07.
Excerpts from CNBC-TV18's exclusive interview with Raamdeo Agrawal:
What did you make of Infosys and the technology earnings this time around?
I think Infosys Technologies' results were absolutely stunning and it came as a surprise to everybody, in terms of being the first large company to come through. Just a day before, Hero Honda Motors numbers came, which was a bit disappointing.
Currency was acting against Infosys for the last two-three years, and this time it has worked for them. Been a terrific performance.
Has this pullback surprised you, from 8,800 quickly back to almost 11,000 kind of levels, would you have expected that?
Yes, I would have expected that because I still believe that the meltdown, which happened was in a short period of 10-15 days, the amount of liquidation, which had to happen in F&O, that led to the decline rather than any fundamental reason in the market. So once the decline was over, which was overdone; clearly the market had to rally strongly.
How are you feeling about valuations now because we are somewhere in between the lows where we bounced from and the 12600 peak, which we had reached. We are somewhere in the middle of that 10600. How do valuations look to you now?
There are two aspects to valuations, one is earnings growth and second is the interest rates, which is the discounting factor. What is happening is that earnings are still strong and at least for FY06-07, we do not see any kind of slowdown from corporates yet.
But interest rate has significantly moved up from 7.5% to 8.4% and it is still climbing. So instead of a tailwind, we have a headwind in terms of interest rates.
One factor is in favour of the market and the other is against the market because discounting is happening of the declared corporate profits at a much higher cost. So there is a rise in earnings and a fall in interest rates and that have given a way to different thing. There is a consensus that there is a fair valuation to the market and even I think that it is not an extreme valuation on an upside, but it is not even an extreme valuation on the downside. So one cannot get any outside return per se.
You mentioned Hero Honda, where you were a bit surprised by the margin contraction and is that something you think will spread across the entire auto sector?
It will definitely spread into the two-wheeler sector because another players have taken significant rises in the last three-four months, there was a good volume growth but with an increase in steel prices, cost of each two-wheeler rose by Rs 800-1000.
But they have not been able to pass it on to consumers because of competition, so 13.5% EBITDA margins compared to about 15% is a big dent for a leader with 48-50% kind of market share.
So that is the story of the current competition situation but that is not the end of the story. The companies are raising prices of their products, not to compensate but to reach their margins. So we hope that overall the year would be better than the first quarter.
What
As far as the earnings bullishness is concerned, clearly cement will be one of the very strong performers, like the June quarter results, which is likely to come in and is expected to be absolutely stunning. All the three months saw very strong volumes and very strong prices and still prices are very firm, so the earnings will be very good in Gujarat Ambuja Cement, ACC and even Grasim Industries.
All of them will have see a tremendous boost to their earnings and the only issue is that the underlying assets on a PE basis is looking much more reasonable now.
But the underlying assets, since it is a commodity business, people would like to buy the underlying capacities at a reasonable price. If the replacement cost is at about $75-$80 and if one can buy running cement plant at about $ 70, $ 80- $ 90 or $ 100, then that would be a good price to buy a cement stock but the really good ones are trading close to $ 150-$ 160. That valuation issue is present, but earnings wise there is absolutely no issues about cements giving a record performance this year.
For two of these sectors, cement and IT, do you find compelling stories in the midcap space as well or is it only a frontline story?
IT looks to be absolute because in IT, volume growth in any case is present, price is stable and one of the missing links was the rupee appreciation. Now with the kind of oil prices that one is seeing and with the kind of slowdown in foreign investment that we are seeing in India portfolio inflow, I think the rupee will come under tremendous pressure for sometime.
For 2006-07, very large contacts for outsourcing and offshoring will come up for renewal. These will be opportunities for Indian companies, which have stabilised their credibility beyond doubt. In the IT space, players like Infosys, TCS, and Wipro will have a very good run in the market.
What is your call on the market from here on, how do you see the rest of the year panning out, given the kind of volatility that we have seen and what are you expecting from earnings and interest rates?
Right now it looks hazy to me, but I would still think that 3 years of great performance in the market from 3000 to 12000 has been a terrific run and psychologically also, there is some kind of fatigue.
Markets do not behave in that caliberrated fashion but I would think that this would be the year of no return or very marginal return, positive or negative. For March 07, this would be my call because I think the Indian economy is headed for a record run. Three years we have already seen about 8% and in the fourth year, we are expecting 8% plus.
If the economy grows at 8% then a lot of businesses will do very well. There will be stock specific opportunity in the market but market, as a whole may not go much beyond.
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