If I have to stick my neck out and indicate that this is going to be probably a bull market 2.0 which is going to be as elongated or as probably better than what we saw in the period of 2003 to 2007, said Dhiraj Sachdev of HSBC Global AMC.
It was the start of the earnings season and last trading day of the truncated week for the Indian equity market, both the benchmark indices closed lower.
It was a week of consolidation for the Dalal Street. Infosys too reported a subdued fourth quarter with a lower than expected FY18 dollar revenue guidance.
Globally, too risk-off continued with US Dollar hitting one-month low on back of President Trump talking down the currency, while gold was at five month high.
To talk about all that transpired in the week gone by and the outlook for the market going forward, CNBC-TV18 spoke to Dhiraj Sachdev, Senior VP & Fund Manager HSBC Global Asset Management.
Sachdev believes the correction witnessed in the market is just a pause in the near-term. The correction is going to be only short-lived as the money will get invited into corrections.
He is optimistic that this could be Bull Market 2.0, which is probably going to be maybe better than we saw in 2003 to 2007 and in 12-18 months from now, we may be better than we are today, says Sachdev. However, he has a caveat that individual stocks that have run ahead of earnings may be punished if their earnings disappoint
It is important that investors should focus on quality of the company than its market cap, says Sachdev.
The house is upbeat on midcap non-banking financial companies (NBFCs), stock broking firms, agro and speciality chemical companies.
According to him, cement and telecom may report weak earnings in Q4.
Ashwani Gujral of ashwanigujral.com also shared his views on market and stocks.
Below is the verbatim transcript of the interview.
Sonia: The key talking point this week was what happened with Infosys. It soured the sentiment in the entire sector and it just gives rise to the concerns and the stress that the sector is going through with the way the management has reduced their guidance as well. As a long-term investor perhaps in the IT stocks and in Infosys, how would you approach it?
Sachdev: I can’t talk about stock specific, but from a sector perspective, the sector has been facing a lot of challenges in terms of growth and the recent headwinds being on the part of rupee as well.
However, there is a renewed optimism as far as the US market is concerned. Obviously we know that US market has been growing pretty smartly and in terms of verticals like banking, financial services, or retail which accounts for a bulk of IT spending, it should augur well over time for the IT companies.
On the other side, there are challenges in the form of hike in visa cost, or relative growth being completely muted.
So, net-net, if we have to form an opinion, I think unless you have a compulsion of being an index fund player, or a largecap fund player, you can at best be neutral because valuations in the sector are by your side. This is a sector which generates a lot of free cash flow, etc. So, growth being an issue, I think at best you can be neutral because valuations are supportive.
Sonia: What about the market as a whole, are we looking at taking some money off the table because of the risk off that we have seen globally or is this as good a time as any to put more money to work?
Sachdev: If I have to take a step back, in the last few months the rally has been led by several fundamental factors, be it state election verdict, demonetisation’s short-lived impact, expected improvement in the corporate earnings, or even some resolution in the form of bank NPAs loans getting resolved over time, at least the step has been taken because this has been a major challenge for both the Reserve Bank of India (RBI) and the government and the near term GST rollout. So, these are several factors that have contributed to the rally.
Our sense is that even more bigger thing that is driving this rally is the shift in domestic allocation in favour of equities from the traditional physical assets be it real estate or gold. I think this rise in equity culture is going to create a sustainable rally in times to come. So, while we may expect some pause in the near term or short term correction, the correction is going to be only short-lived as the money will get invited into corrections.
While the market may have run ahead of time, ahead of earnings growth, ahead of economic recovery, the broader market still trades at about 17-18 times which is reasonable, if not steep. So, net-net, if I have to stick my neck out and indicate that this is going to be probably a bull market 2.0 which is going to be as elongated or as probably better than what we saw in the period of 2003 to 2007, maybe 12-18 months from now we may be much better than what we are seeing today as we speak.
However, let me add a caveat to my bullish tone -over the medium to long term, in individual cases we are seeing stocks running ahead of earnings. So, if there is any slight amount of earnings disappointment, those stocks will be punished.
Besides, in many cases, valuations are not deserving for mediocre businesses in terms of their business model. Also, in IPO listed companies, we are seeing unjustified, inflated scarcity premium and the valuations are in bubbles. So one has to be very careful as far as IPO listed companies are concerned. So, barring that, we find pockets of opportunities still existing in many of the midcap sectors.
Surabhi: I am going to take up your point on earnings because what you said is perhaps already playing out on the street. The kind of correction for instance that we are seeing in the metal side of the market or what one will actually expect from the financials this time around given the rally, so, if you are saying that there could be pockets which are vulnerable to earnings disappointment, which are these big pockets or the prime pockets that come to mind?
Sachdev: If I have to just give brief view on the earnings for the March quarter, I think NBFCs will stand out because you might see post demonetisation period at least the AUM of the NBFCs or financial services companies will be better or come back to normalcy. They will have some kind of NIM expansion because of wholesale borrowing cost or lower bond yields and as well as asset quality will be stable for several housing finance companies.
The commercial vehicle (CV) finance companies or microfinance companies will have higher credit cost because of low collection efficiency. On the other hand, some of the sectors which can face problems in the March quarter numbers include cement or telecom sector because of higher competition intensity and even autos, the volume numbers has been lower and because of heavy discounts or headwinds on account of higher raw material prices.
However, barring that, we believe the NBFC space or the private banks will probably standout compared to the others. More so also the last years March quarter numbers for corporate financial companies or corporate finance banks had accelerated bad loan provisioning which may not be there in the March quarter numbers this year.
Surabhi: Where do you expect the earnings outperformance?
Sachdev: As I mentioned, NBFC is one space. Optically financials including corporate banks should stand out. You may also see metals optically looking attractive though we are not really confident on the metals rally because we feel that large part of the rally in the last few months has been driven by more US announcement on infrastructure spending. So, on a mere enouncement if these companies or these stocks or metal prices have rallied, those may fizzle out.
Part of the rally is also driven by improvement in Chinese data as far as metal sector is concerned. However, our sense is that more than the demand environment, it has been production cuts from China. However, from a global metal perspective, or a local metal perspective, we feel that integrated steel players stand a better chance because of protectionist regime or access to lower raw materials in India, or they have the benefit of rise in steel prices.
So, I think integrated steel players or some companies which will benefit on account of lower leverage or deleveraging should be the one to look after as far as metal segment is concerned.
Surabhi: It has been an interesting week when you are looking at what midcaps have done and what the largecap story has been because while the benchmark index has been down by about 1 percent, the midcap index actually saw a rise of almost eight tenths of a percent and we have seen a lot of different stories, jute stocks, tile stocks, a lot of different plays sort of move around here and there. Is there any particular midcap basket that you like because of a certain theme or a certain policy play?
Sachdev: I think I have been generally questioned on the debate between midcaps versus largecaps and I think this debate is completely futile. The focus has to be on the quality of business, the underlying growth, the sustainability of cash flow generation, etc. rather than debating about the market size or market cap of the company. However, having said that, the midcap is a vast ocean of universe of stocks and there are unique business midcaps, to expensive midcaps, to attractively valued midcaps, to lots of varieties of midcaps across the sectors or emerging businesses which may not necessarily be available in the largecap space.
However, there are several themes that we like or several segments that we like within the midcaps. One of them has been the NBFCs, financial services companies within the midcaps. So be it a gold mortgage finance company or a housing finance company, are the spaces we like because the valuations are still attractive. We also like stock broking and wealth management companies because of the reasons mentioned earlier wherein there is a shift which is happening into financial savings and this augurs well for wealth management companies, or stock broking companies as well.
Besides, we like agro and specialty chemical companies. Agro for reasons that only handful or small percentage of the farmer community is aware of agri input space or usage of pesticides. Given the fact that there is an increasing pressure on them to improve crop yields because of rise in labour cost, or rise in food cost from time-to-time, I think that space is very interesting. It is a very capital efficient business with USD 6-8 billion market size growing at 12-14 percent. We like the speciality chemical which is a space which is very similar to pharmaceutical business, but with less of a regulation.
I think the environment concerns in China is shifting this business into India and most of these companies have demonstrated superior chemistry skills over time. Lower crude prices is also helping them in terms of driving their growth and again the business is very capital efficient. Besides we like other segments within the midcaps which includes cement, print media, and home textiles where the valuations are still attractive.
One specific mention since I talked about gold mortgage finance, I think there are only a few companies that are listed as organised gold mortgage finance companies and the penetration of these companies are still less than three or four percent as far as organised gold mortgage finance business is concerned. So, there is a lot of room to grow and the availability of retail financial products has a lot of opportunity given the fact that even Jan Dhan Yojana is talking about the same. So, we like broad NBFC theme within the midcap space.
Sonia: You started off the discussion by telling us that you are bullish on the market at least from the very longer term. Do you have any kind of Nifty or Sensex target? I am not looking for a number, I am just trying to gauge what the returns in this market could be for an average investor, say over the next 6-12 months?
Sachdev: Next six months is difficult because large part of the returns have been up fronted now. Since I manage midcap funds, I cannot give a target. We do not use target specifics for Sensex and Nifty, but I think it is reasonable or conceivable to understand that if the earnings growth is expected to be higher of 18-20 percent over the next three years and we are hopeful that this time it should mete out compared to the earlier periods where the hopes on the earnings has not been materialised. That kind of 15-18 percent kind of returns compounded should happen for the next 2-3 years for the retail investors on the largecaps.
However, if you identify some of the midcap names pretty well, the alpha generation capability or returns higher than the market averages becomes even more compelling. So, that is why relatively in an economic cycle upturn, midcaps tend to outperform and that is what we believe.
Sonia: We have discussed this, the market has been sideways this week. Do you expect a similar trend next week as well?
Gujral: It depends on results. I do not know when IndusInd Bank, they come out with blockbuster set of results. You could have the opposite of what happened on CNX IT on the Bank Nifty. So, very event specific, but on declines, it remains a buy on dips type of market and 8,800-9,000, that is now a line in the sand. All the consolidation has happened in the last two years.
From here, you will see higher levels, but only once the market gets a sense of what the earnings are going to tell the market. So, the idea should be to keep on buying the financials, non-banking finance companies (NBFC), etc. and probably stay away from IT metals.
Surabhi: On metals or on IT for that matter, after the drubbing that we saw on Thursday, is there still anything to play on the short side or would you rather completely avoid a trade there?
Gujral: In a bull market it is often not a good idea to go short, but yes, more downside should be possible, both on IT and on metals. Metals is probably correcting because it had a huge rally and IT meanwhile remains in a bear market and that bear market continues. Bear markets end when everybody who had to sell has sold. I think a lot of people are still quite overweight on IT. So, till all of them get out, I do not think the bear market on IT will end.
Sonia: What about your stocks for next week? Anything interesting on your list?
Gujral: Stocks will do well. Even today, the market bet was hardly 1:1. So, oil marketing is breaking out after being subdued for several weeks. So, Hindustan petroleum Corporation (HPCL) has a target of about Rs 590.
Escorts has done extremely well through the week and more could be expected. This could have a target of about Rs 600.Indiabulls Housing Finance, that is also a fresh mover, housing finance did well all through the week and out here, we could expect targets of Rs 1,100.