Investment opportunities will also emerge with the formalisation of the economy leading to shift of market share from unorganised to organised sector, Gaurav Dua, Head of Research, Sharekhan, said in an exclusive interview with Moneycontrol’s Kshitij Anand:
Q) Markets have hit a fresh record high in November but the momentum fizzled out later in the month. Do you think the consolidation is likely to continue or the index will climb the wall of worries and hit fresh highs in December as well?
A) Our base case prognosis is that the Nifty index will consolidate around 10,000 for the next couple of months instead of showing any meaningful breakout on the up or downside.
Overall, we are likely to end 2017 with healthy gains post two consecutive years (2015/2016) of muted performance.
We expect buying interest to continue in certain pockets of stocks and select companies. Consumer discretionary companies could see buying interest as the adverse impact of GST eases out and domestic demand picks up in the second half of FY2018.
Q) The broader market seems to be racing ahead of benchmark indices. Do you see the outperformance of small and midcap stocks to continue in near term?
A) Honestly, it is not right to paint the entire mid-cap and small-cap space with the same brush. There are pockets of stocks and sectors where the valuations are not comfortable anymore.
But, we do see enough scope for stock-specific investment opportunities in the mid-cap space, especially in those segments that have multi-year structural growth outlook.
One such opportunity is the massive spending of Rs. 5 trillion on roads under the Bharatmala project which will immensely benefit pure construction companies with strong balance sheets.
Investment opportunities will also emerge with formalisation of economy (policy measures are taken to curb parallel economy) leading to shifting of market share from unorganised to organised sector in highly fragmented consumer segments like footwear, building material, consumer
Electrical products, etc.
Q) What is your call on PSU Banks?
A) Banks are the lifeline of an economy and the huge allocation of Rs. 2.1 trillion to recapitalise and strengthen the public sector banks (PSBs) is a step in the right direction.
It is likely to help banks clean up their books, while also allowing them some legroom to grow their lending book in the coming years.
Hence, we think it will dramatically change the outlook for public sector banks (PSBs) though there is little clarity on the details and timelines of capital infusion.
However, we believe it would be better to stick to large banks like State Bank of India (SBI) and Bank of Baroda rather than dabble in small-sized weaker banks.
Though the development will be seen positively by rating agencies, we see little scope for a sovereign rating upgrade as rating agencies will be worried by the possibility of higher fiscal slippages and rising commodity prices-led inflationary pressure.
Q) We saw money moving to PSU banks which are highly under-owned as private and NBFC stocks corrected while PSU stocks rallied. Do you think the trend will continue?
A) The recapitalisation program has improved the outlook for PSBs considerably, and it is likely to result in some reallocation by large institution investors who have been underweight on PSBs and overweight on private banks and the NBFC space. This rebalancing could result in a brief period of volatility in private banks and NBFCs.
However, we continue to remain positive on them and see it as an opportunity for
Investors’ to buy retail-lending focused quality private banks and NBFCs at better entry points.
The retail lending space is in a sweet spot and the growth outlook of retail lending banks and financial companies continues to remain healthy.
Q) Sectors which you think could emerge as a dark horse in the next 1-2 years and why?
A) The two sectors that have been languishing but could outperform over the next couple of years are -- telecom services and construction companies.
The consolidation in telecom services space and rationalisation of discounts (gradual unwinding of aggressive launch tariffs by Reliance Jio) could potentially change the dynamics of the telecom services space.
On the other hand, construction companies would immensely benefit from the aggressive capital expenditure by the government to support the economy (Sagarmala and Bharatmala projects).
Q) Recent data suggests that fund managers have started paring their position from stocks which have already more than doubled investors’ wealth in 2017? Is it a smart move and retail investors should also start doing that with respect to their portfolio?
A) Investors who have the time and skills to actively manage their portfolios should look at adding alpha through active churn or rebalancing of their portfolios.
However, for most retail investors, it makes sense to identify select structural growth stories and invest in them in a systematic and gradual manner rather than try to time the markets.
Q) Any top under-owned stocks which you think could generate wealth over the next 3-5 years?
A) In terms of a dark horse, we believe Aurobindo Pharma, Tata Motors DVR, and KNR Construction are three stocks that have underperformed and could provide handsome returns over the next couple of years.
Q) Will poll outcome in two major states have a bearing on markets? Do you think it will be a litmus test of the government ahead of 2019 general elections?
A) Yes, definitely. The street will be keenly watching the outcome of the forthcoming state elections. Any signs of the ruling party losing momentum will not be taken positively by markets especially in Gujarat (as it is the Prime Minister’s home state).
Q) How are earnings panning out in the September quarter? Do you think earnings will be back in double digits?
A) Q2 earnings season has largely been in line with our expectations. The key surprises have come from some of the private sector banks who have reported the unexpected level of slippages and divergence in reported non-performing assets (NPA) in FY2017 balance sheet post audit by Reserve Bank of India.
This clearly reflects that the stress in the banking system remains at elevated levels. In contrast, the restocking post-GST has boosted results of certain consumer sectors such as autos, cement, and other discretionary consumer products.