Moneycontrol
Jul 23, 2016 11:38 AM IST | Source: CNBC-TV18

Equities to outperform over 3-5 yrs; stay invested: Emkay Global

Over the next 3-5 year period equity as an asset class is sure to outperform and give superior returns is the word coming from Krishna Kumar Karwa, Emkay Global Financial Services.


Although the valuations of the Indian equity market may look a bit stretched, equity is the place to be in and over the next 3-5 year period equity as an asset class is sure to outperform and give superior returns is the word coming from Krishna Kumar Karwa of Emkay Global Financial Services.


Being a long-term investor, he does not advise investors to exit equities. However, if valuations for a particular stock have gone beyond a reasonable level then one can book profits in them but stay invested in equities, says Karwa in an interview to CNBC-TV18. He says that if a stock has to be a multibagger then one must hold it for at least 3-5 years.


When asked about the domestic risks that would impact market, Karwa says if GST is not passed in the monsoon session then that could be one short-term negative trigger. Two, post monsoon if the economic does not recover as expected then that too could disappoint the market, he adds. 


Globally, one will have to keenly watch out the impacts of Brexit going forward, says Karwa.


It was a week of consolidation for the headline index. However, the midcaps index outperformed. The market witnessed a change in leadership with PSU Bank Index and IT Index was weak but the healthcare index was up but NBFCs stock emerged as frontrunners.


So, if one had picked the right stocks like for example Biocon, SKS Microfinance and brokerage stocks they would have surely made a lot of money.

Meanwhile, Dhananjay Sinha of Emkay Global Financial Services talking on sector trend says, in the pharma space companies with less exposure to US are outperforming. Aurobindo remains their top pick in the space.


With regards to auto space, the key driver will be volume growth. He expects volume growth to pick up for the two-wheeler and tractor segment and so is overweight in that segment.


IT according to Sinha is seeing a lot of headwinds and business growth for them is under pressure currently. So it would be difficult for large IT stocks to grow at double-digits. However, he does not see huge price corrections in them.


According to market expert, Jai Bala, Cashthechaos.com, if the market does not explode in the first half of next week then there could be short-term volatility for 8-12 weeks. However, he is confident that it would not impact the medium to long-term view.

Below is the transcript of Jai Bala, Krishna Kumar and Dhananjay Sinha’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: It has been a week of consolidation, but the earnings season has not been too bad. We have had a great set of numbers from pockets like cement, etc. how have you read into the progress so far?

Karwa: I think the results season to start with has been along expected lines and we have not had too many disappointments, that is the positive part of the season. But more than that from a longer term perspective, we are in the midst of a bull run and the expectations going forward is very positive. And that should be the key thing that investors should be looking at rather than focusing on only on the quarterly numbers per se.


Also, wherever some numbers have disappointed to small extent, but the stock price correction have not been too sharp or too deep. So, investors are very clearly banking on a recovery on the second half as far as most of the domestic economy facing stocks are concerned. You have had challenges on the IT sector. So, there are challenges and where expectations where slightly mismatched over, so we had seen some sharp corrections over there.

But as far as the domestic economy facing stocks are concerned, investors are not looking at the quarterly numbers. They are looking at the recovery which will come in the second half.

Anuj: But, what about this whole liquidity versus valuation argument. The Indian market is not cheap. In fact, it is among now the most expensive historically. You could argue globally that is the case, most markets trading above median valuations. But do you think we could be preparing ourselves for a bit of a nasty shock if and when the fund flow situation dries up a bit.

Karwa: Honestly speaking, in the longer run as you rightly said it is the valuation which will finally come into play and liquidity can drive a market up to a particular level. But investors would finally always have to be careful about the valuations per se.


However if we look at the global liquidity, etc. and the negative interest rate environment and although our markets, from historical perspective may look slightly rich but how economies of our size in the world are able to grow at 7-8 percent.

So, markets currently are in a mood to look at the future than worry about – the valuations are not exactly obscene. It may be slightly expensive, but the expectations going forward for the next few years as far as the domestic economy and domestic economic stocks are concerned, that is what the market is currently banking on.


One has to also respect that the domestic investor flow has generally been very robust. Most other asset classes beside equity are not giving exactly good returns. Most of the emerging markets have had very good flows. So, we are at par with that.


Anuj: The sector of the week was all your NBFC stocks, in fact it has been remarkable the way some of these stocks have rallied now. Do you think there is a bit of a bubble building here or do you think the fact that since Krishna spoke about domestic story this could continue to run going forward?

Sinha: I think in the financial space, what is very critical to really observe is that you have seen a significant run up as far as banking stock in general is concerned. I think after certain under ownership that has been there in the PSU banking space, there has been a significant bounce back that we have seen. I think the rally that we are seeing with respect to the NBFCs, a leg up after the rally that is happened in the banking space, important thing to understand is that over the past three or four months there has been a considerable decline in the 10-year yields.

It has declined from something like 7.80 percent to 7.30 percent or thereabouts. After the interventions that RBI had done with respect to liquidity through OMOs, I think the whole liquidity deficit actually vanished and I think that has been a significant boost for some of the banking stocks especially the PSU banks. Many of these PSU banks have been running short maturity ALM mismatch so sort of a decline in easing of liquidity scenario and decline in 10-year yields actually boosted the sentiment in favour of the PSU banks.

With respect to the NBFCs, the cost of fund actually decreased with easing of the liquidity scenario. So, I think that is something that the NBFC stocks are actually catching up with. So, I think that is a very important thing. Important thing to really notice is that whether this will be continued going forward or not. As of now, the liquidity seems to be pretty good but you see that inflation is actually creeping up so it is important to know whether the RBI can continue with that kind of robustness as far as the liquidity is concerned.

Two, what we have to really also observe is that with the robustness that has been there generally, whether the credit growth for banking sector really improve or not. So, currently the credit growth for the banking sector at 9 percent is still about 25 years low. Our view is that the credit growth will actually improve going forward and hence eventually in the financial sector what will drive is the business growth rather than just the liquidity or G-Sec yield.

Sonia: We had a couple of these plates showing the movement in the pharmaceutical space and one of the big stocks of the day, of the week has been Biocon, Aurobindo Pharma was also the big Nifty gainer. What is the sense you are getting about pharmaceutical? Do you think that some of the underperformance is now getting corrected and is this a space that one can bet on for the rest of the year or do you think a lot of the juice is already out?

Sinha: I would say that after the sharp correction that has been happening over the last one year largely to do with the USFDA observations, etc and I think there has been a sharp correction that has happened, so, I think that part is actually fading out as of now. Within the pharmaceutical space, what we have seen is that pharmaceutical companies, smallcap pharmaceutical or midcap pharmaceutical companies who had lesser exposure to US and more exposure to other continents, they were actually outperforming.

However, going forward it does appear that the sense we are getting is that the concern on the US regulatory observations, etc is sort of fading out and I think people have found value over there. Aurobindo has generally been doing well. It has escaped many of these regulatory concerns so Aurobindo has been our top pick for many years. It continues to be so and I think that has been doing well. So, that is one of our top pick.


Sonia: Apart from pharma we also had a lot of big moves come in the NBFC space as we were just discussing and then some great result reactions also from the likes of Ashok Leyland, Exide in the auto space, how did you read into that and from that space what is your top pick now?

Sinha: In the auto space we believe that the key driver for auto space will be volume growth and we see volume growth really happening in the space of tractors and also two wheelers. So, we have seen that there has been a considerable increase in government spending as far as revenue spending is concerned, net of interest payment it is growing at something like 17 percent and our long term correlation shows that there is a very high correlation upwards of 0.9 with respect to tractor volume growth and also two wheelers. So, those are the two spaces which we are very bullish about and there is a possibility of positive surprises as far as tractor volumes are concerned.

In the auto space as far as Ashok Leyland is concerned there has been a sort of a positive surprise with respect to margins largely because of the lingering impact of low commodity prices that is still persisting on the raw material cost but that could actually fade away going forward. However the product mix has actually boosted the sales growth and that has been positive for Ashok Leyland. The important thing with respect to Ashok Leyland is that volume growth has actually been decelerating over the past few months. So, it is in the lower teen levels and because you have had a pretty good run over the past one and half years it is possible that with a stronger base that might actually continue to decelerate.

However in the auto pack we would like to be overweight tractors and two wheelers in particular.

Anuj: You have seen many market cycles and many earning seasons, what is the sense on IT and Infosys in particular because last year it looked like it was taking leadership position and things have turned around. Having heard the management commentary would you like to believe that it was an aberration and things would be back to normal soon or would you start to give slightly earnings multiple to IT companies now?

Karwa: In the IT space per se the whole sector seems to be into a lot of headwinds as far as the global business itself is concerned plus also you have challenges as far as the whole business transformation which is happening and there is lot of automation and non-linear growth etc. The base itself for most of these companies is so heavy that slight here and there and you can see the impact.

So, the whole IT space is going through a lot of headwind and plus there is also challenges as far as lot of global captives are now coming into play again. So, the business growth itself is a challenge. In the last few years or rather last one year there has been a lot of expectations which have been built-up as far as Infosys is concerned and this was the first quarter where probably they disappointed and the stock price correction was may be slightly more severe than under normal circumstances. So, it is a case of mismatch of expectations than anything else.

You have to understand that these are companies with such high earnings base and revenue base, for them to be able to grow beyond high double digit would be very difficult because the base is so high. What protects these stock prices etc is the huge amount of cash generation that these companies do. The valuations are slightly expensive but may be a few quarters down the line they would start looking reasonable. So, the price correction whatever has happened is fair enough. They could underperform but a severe price correction I don't think so.


Anuj: What is the advice now from here on? Stick to equities, do you think they will still outperform the rest of the asset classes or is there temptation to book some profits specially those who would have entered post Budget and since then the market has given such a clean run?

Karwa: I am always a long term investor. So I wouldn't suggest investors to exit equity in any fashion. The thing is that if the valuations of any of the stocks that they are holding if they believe that they have gone beyond reasonable then it is a point that okay, you can book profit. However over a 3-5 year period I believe equity as an asset class will outperform and will deliver superior returns. So, you need to be invested. Sometimes from people like you and I receive question that okay, what is the next multibagger, but for that you have to hold a stock for 3-5 years for it to become a multibagger. So, I would request all investors to not have the temptation of taking short term gains and look at the longer term picture. So, stay invested, I am sure it will deliver superior returns.

Sonia: What do you think is the next worry for the market or next problem? Where do you see the negative trigger emerge from?

Karwa: Locally, if you look at it then temporarily there is this expectation at least in the Monsoon Session that your GST bill etc will be approved. For whatever reason if it doesn't happen then there could be a short term blip because of that. Then the expectations post monsoons is about the economic recovery in the second half of the year. So, that sense you will get in the first quarter next year. So, if the expected economic recovery if it doesn't happen for whatever reason then valuations will become expensive. So, these are the two things as far as domestics.

For the next four-five months there is a lot of hope in the system and that hope whether it will be justified or not you will come to know by the year end or maybe by the first quarter next year. So, these are the two things the market needs to worry.


Globally, every time you keep on learning new acronyms. So, I don't know which is the next acronym we have to worry about. Let us see how the contours of this Brexi pans out and what are the challenges over there. So, that could be something which you need to worry about.

Anuj: What do you think of the current market set up? At index level we are consolidating. Do you get a sense that we will break out again?

Bala: When we spoke last the market was about 7600 and the markets have moved up pretty well from there. We have seen another 1,000 up from 7600 levels. While we wanted the market to see much more powerful price action but the market has moved up.


The message we are getting from the market at this point of time is that the market needs to explode in the first half of next week. If that doesn't happen, we have to slightly tweak our short term view on the market. Basically, it could be something like it will increase the short term volatility and probably the market will chop around for several weeks, say something like 8-12 weeks, but it doesn't impact the medium to long term view.

However, what the market is doing at this point of time is actually so far we haven't see an explosive price action but the market is trending up that is good, but if the market doesn't explode in the first half of next week, we need to tweak the short term view of the market basically, we are looking at short term volatility stretching to something like eight weeks plus, so it is very important for the market to see a powerful move in the first half of next week. If that doesn't happen, we are going to change the short term view. Whereas the medium-term view which we presented in March saying that the market is heading for record highs, somewhere close to 9,600 plus that doesn't get impacted, but usually when I project price projection or time projection it is always conservative. So if this scenario were to pan out where the market doesn't explode in the first part of next week, we are going to wait for the timeframe to be little further down something like a second half of 2017. Therefore, it an important week for the market and it is important that the market see a strong surge in the first half of next week.


Sonia: Can you tell us your view on individual stocks. What are your top buys and top sells at this juncture in the market?


Bala: Let's touch upon the banking index. The banking index has done tremendous job and it has been doing slightly better than the Nifty and despite this fact the fact that State Bank of India (SBI) and ICICI Bank haven't taken out a key resistance; it is going to be pretty important for the market. The next 10 percent of the move for SBI and ICICI is going to be pretty important. If ICICI pierce through Rs 285-295 - that is going to be an important signal for the market. However, same is for SBI; SBI need to take out Rs 255. If it does that the thesis that the market is heading for record high will be reiterated at this point of time.


However, coming to other sectors, we have seen BSE auto index clock record highs and that is very important. We have been saying that from 2009 the auto index has been the leader and so we saw record highs come through in Bajaj Auto and Hero Motocorp. This sector remains quite strong and within this sector Maruti Suzuki still got lots and lots of steam. We are looking at much beyond Rs 5,000-5,800 for Maruti. So this is going to be an important stock for medium-term.


In auto ancillary space, look at Bharat Forge. It is looking very interesting but be careful it is in the midst of a correction. If you are conservative, wait for the stock to take out last week's high, which is about Rs 785. Once that is done, this stock is set to double and we need to place the stop below the low of June 24 which is about Rs 720. So it is important for this stock, it is important juncture for Bharat Forge.

We have been bullish on the midcap cement space. It has been doing quite well, so we are positive on that space but the risk reward is quite low from here. So if you are already long there, hold on to it but don't trade fresh positions there.

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