Expect about 31% YoY revenue growth in Asian Paints: Pankaj Pandey, ICICIdirect

“There has been a sequential improvement in NIMs, I think the credit growth has picked up largely again driven by retail and in retail you have segments like home loans, you have segments like credit cards, personal loan which has sort of done well for Axis Bank, Kotak Bank, HDFC Bank,” says Pankaj Pandey, Head Research, ICICIdirect.com.

What do you make of the overall earnings so far?
The overall numbers as of now are looking fine to us. While IT numbers saw an overall dip in the margins of what you see for most of the players, or the margins are expected to dip next quarter because of the wage hikes and the travel costs but the outlook for FY23 remains intact for most of the companies if not better.

IT overall has been sort of a decent set of numbers. I think Reliance within the oil and gas pack was a bit of a disappointment given that GRMs were lower and in fact when you sort of look at yesterday’s numbers for Chennai Petroleum.

I think their GRMs are better than what Reliance could have clocked. Reliance was sort of a disappointment. I think banking entire sort of numbers have been sort of good according to us.

There has been a sequential improvement in NIMs, I think the credit growth has picked up largely again driven by retail and in retail you have segments like home loans, you have segments like credit cards, personal loan which has sort of done well for Axis Bank, Kotak Bank, HDFC Bank.

Banking and IT numbers have been sort of steady. Banking has been a lot better so up till now overall numbers are quite steady. We will have to see how the sort of rest of the result season pans out, but we really do not expect too much of a tilt in terms of earnings or in our Nifty EPS estimates up till now but yes, we are still amid a result season so let us see how the rest of the season pans out.

Any numbers that you particularly like which from the recent names likes Tata Steel, Axis, ICICI or probably if you can comment on ICICI but any of the other names that you have liked in the last four, five days we have some good seven, eight companies declaring numbers?
Axis Bank numbers according to us are good. There is a sequential improvement of about 11 bps in the NIMs, while yes there has been treasury losses both with Kotak Bank and even with Axis Bank but asset quality concerns are also if you look at GNPAs and NPA sort of declining so Axis Bank numbers according to us are sort of quite good.

Tata Steel numbers I think what is surprising is that the European EBITDA/ton has come higher than what the domestic operations are so that is sort of a highlight, but we must see in terms of conference call whether these numbers are sustainable which we doubt. But in case it is sustainable, yes, the numbers are good.

IT numbers when we look at Sonata Software the international IT services has grown at a healthy pace where the Tech Mahindra numbers are sort of okay, but the company is guiding for a margin recovery from second quarter I think that is also sort of looking good to us.

Supreme numbers were also good while there is a pressure on margins but when we sort of look at the piping segment which has been the anchor driver of the growth last three years it is growing at 17-18 per cent odd and that is what the guidance has been given by the company and with recovery in the margins in the latter half of the year.

So that way I think the numbers are looking okay to us, yes, there is a margin pressure, but I think that is more of a sort of a sequential challenge is what you will see every quarter for some more quarters.

Wanted your take regarding a couple of these retail stocks as well, overnight we got the news from the US that Walmart has cut their guidance, they are saying that inflation is impacting the numbers and that is something which is visible in the stock price which has plunged by around 8-10 per cent as well. The likes of Shoppers Stop etc will be reporting their numbers today and Trent has been one stock which has been on a tear, what do you make of the entire retail space and is there any specific stock that you like from that sector?
Retail is one space which we like a lot, not only from an export perspective but even from a domestic perspective. When you sort of look at Shopper's Stop their margins have been sort of lower largely because they have been sort of selling more branded stuff, now they are sort of expanding their own label and that could sort of fetch better margins.

Structurally, we are quite positive on Shopper’s Stop. Overall, recovery in the retail as a segment has been a lot better so that is why like the entire space, be it Trent, Titan, or even smaller textile companies like Siyaram, Silk Mills or Kewal Krian for that matter.

I think the numbers have been sort of coming out good for a lot of these companies. I think on the export side if US is facing or companies like Walmart or Amazon might face challenges there and what we have done is that something like Indo Count might get impacted which is into the bedding side or which sells bedding sheets so that is one segment which could get impacted but when we sort of look at something like KPR Mills or Gokuldas Exports largely our sense is that the apparel as a segment maybe not that impacted so from that perspective only it is to sort of differentiate but retail is one space I think the overall space addition across peers is going to be a lot more higher than what they have done in the last years so we like the entire space with the names which I just mentioned.

Any of the Adani Group stocks that you like?
We only track Adani Ports and in fact we like the entire logistics as a space because if manufacturing in India must go up given the government has been sort of looking to incentivise the number of segments, Adani Port obviously is a lot more attractively placed.

Besides that we like CONCOR, we like TCI Express, so we like the entire lot but the rest of the Adani Group companies we do not really track largely because our sense is that the price discovery is still there sort of a challenge there so which is we really do not have a view on the rest of the Adani Group but I think Adani Ports is looking quite attractive to us given the kind of plans what they have made in the entire logistics side so I think that is the one stock which we have been liking for quite some time.

Which are the top companies that you would like to bet on, do you think the likes of Asian Paints can continue gaining market share or that will come under threat when these new competitions come into the picture as well?
When you look at the overall set up from new companies which are slated to come up, I think Asian Paints has been gaining market share whereas Kansai Nerolac and Berger Paint to some extent has been losing market share.

For Asian Paints we expect about 31% kind of a revenue growth on a YoY basis. But if you normalise on a three-year basis, it prints normal growth of about 13 odd percent and largely driven by realisation, volume growth is expected in single digits.

Now the company has taken up further price hikes of about 3% so that might sort of help in terms of maintaining or a bit lower dip in their gross margins. Asian Paints among all the players look lot more better in terms of defending the market share and maintaining the kind of growth rate what the sector can do and our sense is that over the next two-three years probably the volume growth could pick up because when we see the kind of launches on the real estate once these project start to get delivered we feel that the demand for ancillary products like paints, switches, wires should go up so probably there are better days ahead for Asian Paints going forward.

When we just talk about insurance companies the monthly data has been good so whether it is IPRU, whether it is HDFC Life some of the names but somehow whenever we talk about top gainers, top movers they do not end up into that list, what is the reason for that insurance space?
When you look at last two years has been sort of slower kind of growth and when you look at from forward perspective say protection which is the highest margin segment, the premiums have gone up and which is why the growth has come down and there are some segments where we are seeing recovery something like motor insurance but in general since the premiums have gone up so there are only few pockets which are doing well.

Home protection products is something which has been doing well because we know that the housing sales have gone up and which is why the home loan portfolio for most of the banks have been doing well and then you have LIC also being there so obviously you have a greater number of companies eyeing for similar kind of allocation.

Which is where the challenge is that and sum. I think SBI Life is the only company which is being outlier compared to the rest of the pack so they have been growing very well and largely because of fact that the penetration in SBI branches is relatively less so as and when they increase the penetration further the growth rates are superlative compared to the rest of the pack and ULIP also as a segment has been soft given the fact that there has been softness in the market so there are some pockets or segments which slow moving and that is impacting the performance of life insurance as well as general insurance companies.

What is happening with the IT space, we have seen the earnings so far but the trend which is emerging is that midcap IT has continued to be better than large cap IT both in terms of revenue growth as well as margin profile. Given the fact that these stocks still trade at much more expensive valuation than the large cap IT do you expect some sort of reversal and the spreads to narrow, or do you think this outperformance of the midcap IT space is likely to continue?
Overall IT as a space probably could do well say two quarters down the line by then we will have clarity in terms of how FY24 probably could pan out or the kind of damage what US Fed rate hike could do to their economy.

From that perspective IT can probably start doing well two quarters down the line and in general when you look at between tier I and tier II names definitely you look at tier II names have been sort of doing very well, so you have something like Coforge which is again growing at more than 5% for good five-six quarters, Persistent 9% growth including inorganic for about five-six quarters and that way some of these tier two names have been sort of growing at the higher rate and our sense is that they will continue to command some kind of a premium multiple and within tier I names we have some companies like where the growth is quite patchy so which is why it is commanding lowest kind of multiple.

Largely the differentiation will be base growth rather than tiering of a particular IT company so if tier II companies continue to deliver high sets of numbers, we have been giving higher multiples to them and which is why Persistent, Cyient and Coforge have been. These companies we have come up with buy post results.

I could not have but noticed one stock that was conspicuous by its absence often called the dark horse of the IT pack, we know the earnings also Tech Mahindra.

Tech Mahindra largely numbers were fine but when you look at margins, margins are quite lower compared to lot of players and then, so while there is an expectation that the communication as a vertical could pick up which is the biggest segment because you are expecting 5G launches happen and as a result of that you will see tech spending going up so benefit of doubt is still not given to the company as of now, we still need to see whether that sort of percolates into higher orders and higher better growth rate so till that time, I think it is very difficult to give a relative benefit of doubt to Tech Mahindra and which is why there has been significant underperformance from this company.