Last Updated : Jan 15, 2018 04:13 PM IST | Source: CNBC-TV18

Abhay Laijawala feels risk-reward more compelling for largecaps than midcaps in 2018

Earnings growth, as well as economic growth, is set to recover strongly in the year 2018 which is fuelling the markets higher. As far as midcaps are concerned, Laijawala cautions investors that the valuations are looking extremely high.

The Indian market witnessed price-to-earnings (PE) multiple expansion in the year 2017 but this year will be all about earnings growth, Abhay Laijawala, Head-India Research, Deutsche Equities, said in an interview with CNBC-TV18.

Earnings growth, as well as economic growth, is set to recover strongly in the year 2018 which is fueling the markets higher. As far as midcaps are concerned, Laijawala cautioned investors the valuations are looking extremely high.

The Nifty50 trailing midcap PE is trading at double valuations compared to Nifty. The risk-to-reward ratio is far more compelling for largecaps than midcaps, he said.

On earnings, Laijawala expects FY19 growth of 22 percent. For FY18, Nifty earnings growth is seen at 21 percent YoY for the December quarter, and this is not entirely related to the base effect.

Deutsche Bank has four key themes mostly related to the India story – rural reflation, high growth-high CASA banks, focus on infrastructure, tourism and affordable housing, and digitisation.

The common thread among all four themes is growth, and that is what is driving our confidence and Sensex target for the year 2018, he said.

Laijawala was positive on the banking sector. FY19 will be again be a year of banks, he said. The terms of trade are likely to move in favour of banks than NBFCs.

He preferred private sector banks compared to public sector. Within private banks, Laijawala picked high growth-high CASA banks. The loan growth is likely to recover in FY19 which will be close to 15 percent.

Below is the verbatim transcript of the interview.

Anuj: Do you think the year has changed, the theme remains the same, lot of midcap outperformance, every dip being bought you think we remain in that kind of market?

A: The year has changed but the themes have also changed. I think the key theme for this year is the expectation of growth returning. I think that was not there last year, so clearly that is what is driving the market. We do think that both economic growth as well as earnings growth is set to recover strongly this year. In that sense that creates very strong catalyst for the market.

As far as midcaps are concerned, we do believe yes, midcaps are doing very well. The year has started very positively, but we would like to caution over here that the valuations are looking extremely high. The Nifty trailing midcap PE is trading at close to double the valuations of the broader based Nifty. So, we do think that the risk reward this year is far more compelling for the lager caps than the midcaps.

Sonia: You spoke about economic and earnings growth, the possibility of that. Let us talk about earnings growth first. What is the expectation and given that we have seen some positives in the few numbers that have come out are you more hopeful this time?

A: We are, so for FY19 which is what the market is now beginning to look at and what the market will react to we are expecting 22 percent earnings growth. Even as far as FY18 is concerned while FY18 earnings estimate are unlikely to be met in terms of the consensus estimates, we do think that we are exiting calendar year 2017 and going in to 2018 very positively. Our analyst expect Nifty earnings growth at 21 percent year-on-year for the December quarter.

Let us not just go out and say that this is base effect related. Remember last December the Nifty delivered closed to around 17 percent year-on-year growth, so it is not coming on the back of just the benign growth. We are seeing traction in some of the global commodity related sectors. We have seen some traction in some of the domestic cyclicals. So, the answer to your question is we are far more positive on earnings and we will have to really see how the year goes by. The last thing investors want is a disappointment similar to the last three years where you start out expecting double digit earnings growth and you see the year ending at low levels.

Anuj: That is interesting and maybe is that explaining your top bet. I think 90 percent of them is about Indian consumption and about Indian economy related stocks?

A: Absolutely, So we have four key themes for investors this year and almost all those themes are domestic focused. So the four key themes that we have are rural reflation, we have high growth high current account saving account (CASA) banks as a theme. We have pre-election year focus on infrastructure, affordable housing and tourism as a theme and we have digitisation as a theme. So based on all these four themes the common threat is growth and that is what is driving our confidence and our Sensex target for the year.

Sonia: Your views on IDFC Bank and Capital First merger and what the set up looks like now for the banking space as a whole?

A: I am afraid I won’t be able to comment on specific stocks, but for the banking sector we are very positive. In fact we believe that FY19 will be once again the year of banks where the banks probably rest back some market share from both the bond market and the terms of trade also move in favour of banks from the NBFCs. So, we actually see loan growth recovering handsomely in FY19. We therefore do think that loan growth could be in the range of 15 percent or so and if the economy does as well as we think it will then it could be even higher than that.

Sonia: Do you touch public sector banks or do you stick with the private one?

A: Our preferences are more for the private sector banks at this point in time. We like government banks, but our preference is clearly for the private sector banks. Now within the private sector banks as well our preference is for the high growth high CASA banks. Because we do think that in the last two to three years with interest rates remaining low investors have not necessarily recognised the value of CASA. Now in a year when interest rates are going to stay elevated when wholesale funding costs move up, we do see value of CASA coming back.

If loan growth is indeed going to be the central theme then I guess the banks which are expected to show the highest loan growth will probably be I guess most favoured by investors. We also like corporate banks, so we like good mix of the high growth high CASA bank together with some of the cooperate banks as well because we do see I said loan growth coming back.

Anuj: What about the global set-up? The big threat has been to sell the US dollar weakness and of course the big commodity play and that has played out in India as well but is that trade now sort of getting up bit India negative with the way crude oil has moved up? Yours overall thought on the global set-up?

A: The global economy almost looks like it is in a kind of a goldilocks scenario. US growth is continuing, European growth is accelerating and most interestingly what is giving a balance to this entire global scenario the global backdrop is that China is slowing down in terms of relative growth. So, last year we had China growing at 6.8 percent. We expect Chinese GDP growth this year to slow down to 6.3 percent and this is a conscious slowing down of the economy and the other positive for the global economy is that credit to GDP in China has not grown all of last year and that is also now being tempered.

So, therefore very strong growth in Europe, continuing recovery is US, a China that is not necessarily going to add create a very conducive back drop in terms of global aggregate demand, in terms of global earnings growth. The risks however at some point in time of this faster than anticipated recovery in Europe could come from the European Central Bank (ECB) and how the ECB guides towards a normalisation.

Sonia: We are now setting the stage for lot of hopes from this Budget. But there are fears as well with respect to the possibility of long term capital gains (LTCG) etc. Do you think even if there is something negative the market will overlook that because there is so much money to be made in this kind of a bull run?

A: Right now as I said the drivers are all positive for both global as well as domestic and particularly with the stage of global economy where we expect the European recovery to be stronger than the US recovery, the dollar is expected to remain range bound or weak. So, that is creating a massive blast of risk on in the near-term. So, coming specifically to India therefore, we do think that if this scenario continues and if there is any disappointment as long as it is nothing very significant we do believe that the markets bias is likely to stay more positive than negative.

Sonia: What would be a significant disappointment in your mind?

A: The significant disappointment would probably be the long term capital gains tax if the worst case scenario turns out, so we shall have to see. However, our view is that at the stage where we are in terms of the government’s fiscal balances and election in the year ahead it is unlikely that we may have a very adverse verdict on the LTCG. Even if it happens we expect probably the softer aspects of it to be announced. So, we are not in the camp that believes that there will be a significant change in that.
First Published on Jan 15, 2018 11:12 am
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