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Rajat Rajgarhia, Head of Institutional Research, Motilal Oswal Securities said that they are advising clients to focus on companies that have strong and visible earnings growth. He predicts the Sensex will be in the range of 21000-24000 in one year and added that they are looking at 21% for 2008 and 20% for the Sensex.

Speaking to CNBC-TV18, Rajgarhia said that the current Sensex PE is at around 16 times FY09 earnings and that they are looking at an 18-20% growth in tech companies. According to Rajgarhia, a bulk of the earnings growth will come from financials and engineering and infrastructure companies.

Rajgarhia likes Dena Bank which is trading at a P/E at one time. He also likes Bombay Rayon which has a growth of 35-40% on PAT for three years and is currently trading at 7-8 times.

Excerpts from CNBC-TV18’s exclusive interview with Rajat Rajgarhia:

Q: From a strategy perspective, what’s the Sensex range you are indicating to your institutional investors now?

A: We are looking at a Sensex range of around 21,000 to 24,000 over the next twelve months; which is a decent upside of almost 25% to 35% from the current market levels.

Q: What are you recommending or telling your investors to avoid in the largecap index space now - which sectors or which heavyweights?

A: We are advising our clients to essentially focus on some companies where earnings growth is still strong or visible, and in this fall, valuations have become a lot more reasonable. And wherever stocks which were inflated on either asset valuations or had very low earnings visibility for the next couple of years and more earnings coming towards 2011 or 2012 or later on - these are the stocks which would be less preferred over the ones with better earnings growth over the next couple of years.

Q: What quantum of earnings growth are you working at to achieve that 21,000 to 24,000 market levels?

A: For the 9 months till December, we had average earnings growth of around 21% at the Sensex level and we are looking at 21% for this year and around 20% for March 2009.

Q: From an earnings perspective, do you expect any of the underperforming sectors to surprise, like technology, FMCG or Pharmaceuticals?

A: Technology, as far as FY09 is concerned we are on an average looking at a growth of roughly around 18% to 20%, although most of the investors would be looking for the month of April when Infosys will come and give their annual guidance.

As far as FMCG is concerned, I think earnings are okay largely - Hindustan Unilever is yet to report their last quarter but whatever numbers we saw from ITC or Nestle, those were quite in-line. They will grow probably in between 18%-25%. But the bulk of the earnings growth that we are going to see will come from financials, wireless, engineering cum infrastructure.

Q: Just going through the top midcap list, cement has been a rough sector - people haven’t made much money in cement over the last couple of quarters, why do you like India Cements?

A: There are a lot of concerns right now on the capacities which are scheduled to commission from second half of this year. From a slightly longer-term point of view, the demand growth could surprise most of the estimates. While everyone has estimates on the capacity which will come up in the next three years, the demand estimates are still not very certain. We thing demand will also be a function of how much capacity will be there on the ground, for most of the user industries like housing, construction, real estate, infrastructure, we are talking about 25%-30% CAGR growth for the next two to four years. So I would be surprised if the cement demand also doesn’t pick up from hereon because at the end of the day, all these people would be consuming as much cement as they have been consuming in the past.

Secondly, a lot of these companies which are operating on their existing capacities are making significant profits from the improvement in the numbers that you can see over the last two years.

Currently, companies on an average are making USD 25-USD 30 EBIDTA per month and the new capacities which will come up, if they are able to earn similar returns, that’s very profitable. Today most of these companies are trading at sub-USD 100 EV per ton. While if you think about putting up a new capacity, that it will cost you more than USD 100 per ton, plus over and above the two to three years of gestation period where you will have to forego the profits.

So we think the prices have corrected a lot. It makes more sense to start looking at some of the midcap names where the correction has been more severe and where the outlook still remains good.

Q: Why is Dena Bank your preferred pick from the financials?

A: We are looking at overall interest rates this year to come down in the system and PSU banks will be beneficiaries of that. We saw a lot of deposit repricing on the upside last year and this year could be the reverse.

We like stocks which like stocks which trade at one-time book. If you look at Dena Bank, it’s currently trading at one-time price to book March ’09. We have always seen in the past that when you buy these stocks at one time book and write them well through a cycle of low rates and strong earnings growth, you can make significant returns from here. Today, comparable stocks in the same PSU banks trade between 1.5 to 2 times prices to book, your margin of safety is quite high and the returns could be substantial from here.

Q: Bombay Rayon is a midcap idea from Motilal Oswal, why would you ask your institutional investors to buy that?

A: If you look at the way they have executed their growth plans over the last two to three years, they have been consistently growing at a rate of 35%-40%. Plus they have new capacity for which they will get good commission towards the end of this year.

Our own estimates are, profit growth in excess of 35%-40% for the next three years each and if you look at the earnings, it’s trading at something around seven to eight times its earnings right now. So if you just play the earnings growth itself, the returns that you can make out of this stock could be significant.

DISCLAIMER: It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed.

Source: Moneycontrol.com