Rerating of FMCG is based on fundamentals in terms of the whole sector benefitting from GST, said Andrew Holland of Avendus Capital.
The week gone was a week of consolidation for the Indian equity market, with both Nifty and Sensex posting marginal losses. The Nifty consolidated around 9100 levels.
To take stock of the week that went by and the outlook going forward, CNBC-TV18 spoke with Andrew Holland, CEO, Avendus Capital and Technical market expert Ashwani Gujral of ashwanigujral.com
Looking at the market fundamentals, Holland thinks it would be more a stock-specific market than a broader run for indices.
One is really running out of ideas that would make money but shipping is one space where valuations are still attractive believes Holland. So one could look at shipping companies.
FMCG is another space to look at with an eye on goods and services tax (GST) which could be a game changer for the industry and that space could see a re-rating. It is likely to see growth in high teens, says Holland.
However, from the FMCG space, he is not so upbeat on companies that are focused on rural economy because there does not seem to be a strong pick-up in rural economy.
According to him, global growth is likely to pick up considerably and so one could look at companies that have manufacturing or services centres in countries like US or Europe, which could benefit from global growth.
Giving a technical perspective, Gujral says overall the Nifty seems to be in a range of 9050-9250 but in case the market corrects on account of global news like the French election etc then it would give buying opportunities. Buying will emerge and take the market higher, he adds.
Stock specific, he thinks Ashok Leyland is beginning a rally and could go upto Rs 95 and the medium-term target could be Rs 120.
It looks like things are bottoming out for the MFIs, so Equitas Holdings in that space could see it going to Rs 195 on the upside.
Below is the verbatim transcript of the interview.
Sonia: It has been a good weak for the market. It has not been too choppy for the headline index and so much money making in the broader markets. But do you think this trend of a range bound market could continue for a while?
Holland: It could well continue for a while because global markets continue to discount any bad news and treat it as good news. And so until that liquidity bubble bursts and we will keep a little bit more of the momentum to the upside. But you probably noticed now it is becoming a little bit more choppy. And whilst you have mentioned certain sectors or certain stocks, it has become a little bit more rotational, which always makes me fear we are towards the end of the recent run and if anything, could get a little bit more choppy from here.
The results season has not been that great so far and usually the first part of the results, the first week should be a little bit brighter. But it has not been.
So, the rest of the year is going to be where you put your money down in which sectors and which stocks and I think it is going to be less of a broader run for the indices because there is quite a lot of headwinds out there which would just keep things a little bit under control for our markets, given that the valuations anyway are pretty rich.
Prashant: Is it also going to be about protecting what you have already made, protecting your profits? Is it going to be more about what is the new idea where I can actually make a lot of money?
Holland: It is a little bit of both actually. The second part of what you have asked is where I could have made more money, where is the new idea, I think you are running out of them really in terms of good valuations where you can see some reasonable upside. That seems to be taken away very quickly. If you remember at the beginning of this year, I said real estate was kind of my dark horse sector and all of a sudden, it has raced away and valuations have already caught up with some of the expectations that I had.
So, the market is very quick to reward or move stocks ahead of where maybe they should be in terms of fundamentals. So, I said it is becoming a bit more rotational, but there are certain sectors and real estate was one, shipping is another which we had identified as a new place for investment given that where the Baltic Dry Index is and the valuations at these companies are pretty attractive as well. But again, you are starting to see those have run up very quickly.
So, once you come across a certain sector or stock, it is very quickly identified and the valuation differentials that you were hoping to able buy have moved up very quickly.
Sonia: So, tell us where do you see the next dark horse emerge from apart from shipping that you just spoke about?
Holland: It is not a dark horse because it is a well-known sector, but fast moving consumer goods (FMCG) is something that we have become more constructive on. As you probably remember, I have always been baulking at the price-earnings ratio (P/E) that you have to pay for these companies. But I do think that the goods and services tax (GST) will be a game-changer for the industry going forward. So, that is the first re-rating which I can see.
And secondly, for one of the companies who was approached by a potential takeover bid, there is going to be a lot of reorganisation and focus on bottomline, particularly on the margin front which will be positive for the company. So, those two catalysts for that company will be a rerating for it.
If I compare it now to an IT sector where I see very low single digit growth, if that, I now look at the FMCG sector saying it could be double digit, towards the higher end of the teens than the lower end that we were seeing before. So, that is why I think there could be a rerating of this sector away from the traditional pharmaceuticals and IT which have weaker growth at the moment.
Prashant: Is it really about going sector by sector? Real estate is done, private banking is done, telecom, pharmaceuticals, IT, there is no growth there, but is it rotation really which is pushing you into sectors like FMCG because you said rerating, which means multiples should expand. But, multiples are already quite high in that space.
Holland: Now I can actually see that the growth could really start to pick up for the sector. So, whilst the P/Es may expand, you will see a quick upturn in earnings to accompany that. That is what I am trying to say, maybe it is not in the P/E of 34, maybe it is in the P/E of 25-26, as the earnings really start to pick up in the course of the next one year. So, it is a rerating based on fundamentals in terms of the whole sector benefitting from GST.
But also, for one or two companies, one company in particular where the group is going to be looking at improving profitability and margins going forward. So, that bodes well for that company and that is where I am really seeing the earnings tick up which I had not been anticipating before which is why I think the sector is going to get rerated and in particular that company.
Sonia: Am I sniffing your tilt towards some of the rural focused plays as well? It is not just FMCG, but are you looking at also some of the monsoon-related companies, the tractor makers, the fertiliser makers, anything in the agriculture theme that interests you?
Holland: Not really. I know that the forecast for the monsoon have been a little less worrisome than they were before, but I do not know. This kind of weather patterns at the moment, I am sure, is not helping any of the farmers at the moment in terms of what they are doing. I do not really see a pickup in the rural economy so strong that I want to be buying into tractors and the like at the moment.
There are better ideas around and I am going to be very selective in where I want to be. Our themes, have been private banks along with anything to do with infrastructure spending, particularly around affordable housing, building materials has been an area and obviously, as we expect global growth to pick up quite considerably then look at companies that either are well placed, even by having manufacturing or services companies in those countries like US or Europe which will be a big beneficiary of the pick up there. So those are the things that we are continuing to play.
But you will find that there is going to be new sectors or new thoughts around how India is developing as an investment destination. For example, if you take global growth happening, I would expect the financial services sector a lot more interest as companies look for higher grossing assets in terms of yields and that would bring you back to destressed assets and non-banking finance companies (NBFC). So, there could be a lot more action in these sectors going forward and companies which are obviously well established in them. So, that is the kind of areas which we are keeping an eye on and we think there is going to be a lot more interesting plays going forward.
So, it is not just your typical NBFC play. It is looking around and seeing what else could be there and you are probably seeing some of the leading brokerages that have different paths to their businesses, I have seen an uptick as well because it is going to be a lot more interesting, this sector for foreign investors, not just equity investors but foreign direct investors too.
Prashant: We did talk about stocks what you like, your top bets, ideas. Let us just talk about something which is macro-ish, but very important, the French elections. How do you think, how meaningful do you think that is going to be as a trigger?
Holland: It is the first round and up until a week ago, it was really Emmanuel Macron who was more conservative, socialist versus Marine Le Pen. And all of a sudden we are seeing the far left come into the picture with the huge gains in popularity. So, it has become a three-way race at the moment. I still think it is going to play out that Macron will lead through. Marine Le Pen - this has been her third time around, so she is a pretty well-known entity in France. So, there is nothing new behind what her policies are.
If we can get through this with Macron still holding a seriously good lead going forward, then that would do two things. It would probably bring a big sigh of relief to Europe in terms of there is going to be no more disruption, there is not another Bexit, for example. And that would obviously have the euro strengthening, going forward as well. And that would mean taking the view that Macron does get in, France could surprise us in terms of gross domestic product (GDP) growth and actually, all the figures coming out of Europe at the moment are very positive.
So, our view, our base case of global growth, the US first, then Europe and then Japan is starting to play out. But the worst case scenario is that does not happen and Europe is up for grabs in terms of what happens next and that would bring a lot of uncertainty particularly in the currency markets and obviously bond yields would start to spike and there would be a move towards safe haven assets. So, I do not think that is going to happen, but it is always a possibility given what has happened in previous elections recently.
Sonia: All of this makes for great debate between guys like you and me, but do you think Indian investors have to bother at all about French elections?
Holland: No, obviously they do not, but in terms, if you take the worst-case scenario, that would have a risk-off trade and that would bring our markets down. Now you can say that is okay, that is a buy on dips and that has always worked in the past. But a lot of things that have worked in the past do not work in the future either. So, you would have to see what the implications of Macron not getting in and someone else getting in and what their policies are. Now if you take it as Marine Le Pen, she says I am out of Europe, I want the French franc back, that will be a huge change for Europe and that would have a big knock-on effect globally in terms of not just Europe slowing down, but that would have a global impact in terms of growth.
So, I do not think we would be able to walk away from that. We might be able to keep that safe haven tag, but certainly, everyone would pull money out first and then think about what they need to do next.
Prashant: What did you make of the market and what are your top-bets?
Gujral: As far as French election is concerned, they told me market will go down on Brexit, it did not, it will go down on Trump, it did not. So in case, we get these dire scenarios, that will present a buying opportunity.
Overall, 9,050-9,250 that appears to be the range. But in case global markets tumble and we open gap down or something of that sort happens, buying will also come in fairly quickly and you will see the markets head higher.
As far as stock calls are concerned, Ashok Leyland, I just described has gone through a strong basing pattern, the BS-III news was not able to break lows on Ashok Leyland, so chances are that it is beginning a rally which could go possibly all the way up to Rs 95. And medium-term target even up to Rs 120.
Similarly, Equitas Holdings, microfinance has had a torrid time, so it looks like things are bottoming out there. Here we could see possible targets of about Rs 195 on the upside.
And finally, real estate, so far did fairly well on Friday. Chances are we could see Rs 440-450 coming in the next week.
Sonia: What about some of these private sector banks? Yes Bank has hardly given you a dip. It is down about 4 percent this week. Would you buy it at this level or do you think that it could get a bit more choppy and then you will get better entry points next week?
Gujral: These guys are the best buys when the entire market falls for some reason. Bank Nifty comes off 800-1,000 points. Those are great entry levels. If something comes off 2-3 percent, I do not think it is giving you that kind of longer-term buying opportunity. And in terms of trades, private banks are not very strong other than HDFC Bank. NBFCs are much more stronger. So, each time you get a dip out there, possibly those stocks are better buys.
Sonia: What about some of these other heavyweights? Reliance Industries has been strong ahead of its numbers and we'll get to trade Reliance Industries on Monday as well because numbers come post market hours. Would you trade it on the upside?
Gujral: I would think so because all this 30-40 percent rally from the lows of about Rs 1,000 has happened because people are anticipating better times ahead and when the stock is in this kind of mood, it will latch on to any of the positives that are coming out. So, my sense is that Reliance will balance out everything else, the non-performing assets (NPA), the Bank Nifty, etc. and this is the one stock which is likely to push the market higher.
Prashant: A quick work on DLF? You think good for more?Gujral: These guys are really catching on momentum and in a momentum market, easily things can 25-30 percent in a short order. What has happened today is that the day we had that large fall from the highs, all of these real estate stocks had come off 4-5 percent. But they have all taken out that day's high also. In a market which was not doing so well, real estate index closes up 2.5 percent. So, this sort of momentum, chances are can continue. We could see Rs 215-220 on DLF.