We believe that the negative sentiment in the forex and the bond market could continue for a while in the absence of any concrete measures by the policymakers
Considering the peak valuations in market, a correction is expected, hence investors need to look out for quality stocks with earnings visibility, superior management and low operating margin variability, Deepak Jasani, Head – Retail Research at HDFC Securities, said in an interview with Moneycontrol’s Kshitij Anand.
What is your near-term outlook on rupee for FY19?
Factors like the current account deficit (CAD) worries (as highlighted by the Q1FY19 data, released on Sept 07), escalation of trade war worries globally, and concerns that the Reserve Bank of India (RBI) might have to raise rates aggressively to tackle rupee weakness have affected the sentiments across the markets.
On September 10, the rupee declined to an all-time low of Rs 72.91/USD but managed to recoup some of the losses, on the likely intervention by the RBI and speculations that the government might take steps to stem the fall.
A media report, citing an unidentified government official, said that the finance ministry was looking at NRI (non-resident Indian) bonds to raise foreign currency deposits.
We believe that the negative sentiment in the forex and the bond market could continue for a while, in the absence of any concrete measures by the policymakers.
While unabated global risks have led to a strengthening of the US dollar, we think the US dollar barring exceptional circumstances, could remain in the Rs73.50-Rs.68.50 band for the next 1-2 quarters.
On the other hand, when things settle down, we may see a flood of FII money flowing into India leading to Rupee appreciating sharply in a very short period of time.
Any top five stocks which you think satisfy the criteria of value at the great price and why? This is for an investment horizon of 1-2 years.
Our recent fundamental picks include names like:
Mahanagar Gas Ltd:
Monopolistic nature of the business and ramp-up/expansion in new geographies would drive volume growth in the coming years. Better economics of CNG/PNG versus liquid fuels in an era of a buoyant crude price regime and maintained spreads are tailwinds for the company.
Axis Bank has made significant investments to ride the next growth cycle (post-near-term asset quality challenges), with strong capitalisation and an expanding liability franchise.
The worst seems to have been priced in, and the bank is available at attractive valuations as compared to other similarly-placed peers. The new CEO could bring in a fresh perspective to the bank’s growth plans.
Post its split with FCC in 2015 Rico Auto has changed its strategy and now caters to PV and CV markets in addition to 2W. Strong order book of Rs 4800cr, capacity expansion and increasing volumes in alloy wheels, changing product mix are expected to improve the OPM.
Rico is in the process of launching 3 more products and improving profitability may help it get re-rated to a PE comparable with other auto-ancillary companies.
EIL is likely to benefit from the expected capex in the hydrocarbon and petrochemicals industry as it is a market leader for consultancy. It’s a debt-free company with an order backlog of Rs 7229cr (~3.5x book-to-bill). With a healthy cash balance of Rs 2500cr, it may reward shareholders through another buyback or special dividend.
Sun Pharma is amongst the few companies in India to have made large upfront investments in US specialty. OPM are expected to improve on the back of key drugs launch and moderating price erosion in the US.
The company has 422 approved products in USA and 139 pending for approval. Ramp up of generics and specialty business driven by increased investments augurs well for the company as it improves the launch visibility.
How is falling currency likely to impact India Inc., Govt as well as fiscal math?
As per a study, a 1% depreciation in the rupee (if it persists) results in 0.3% increase in Nifty earnings. The Nifty EPS has grown well in periods when Rupee has depreciated.
While rupee depreciation can theoretically help in boosting exports and beneficially impact the trade deficit, the view may not be entirely right as India’s export basket has changed over time from traditional products to engineering goods, which may not be price elastic, but are dependent on income growth in importing nations.
While rupee depreciation will bring in benefits to a lot of net export-dependent sectors, one will have to consider the impact on consumption due to higher inflation (due to higher oil price, higher fiscal pressure and consequent borrowings resulting in higher interest rates) and the impact on external borrowings by the companies which will need to be restated.
India is adding value in the Gems & Jewellery sector; hence, this sector will benefit. The working capital requirements may rise and their forex borrowings may bring some pain.
While for exporters, they will be mildly happy, domestic players will see sales getting impacted due to higher prices. In textiles and pharma sectors, the value-add by Indian companies is large, hence the apparent benefit of rupee depreciation is large.
After a staggering 17 percent decline in the April–June quarter, India’s textiles and clothing exports revived to witness a jump of 11 percent in July due to favourable government policies and rupee depreciation.
In automobiles, companies selling domestically will be hard hit – on the one hand, their costs will rise to the extent of imported content and on the other due to higher fuel costs, demand for their products will get impacted.
Refining will be impacted beneficially as the refining margins that are denominated in USD will get converted at a higher Rupee value. On the other hand, higher working capital requirement and possible intervention by the Govt to introduce fuel cross-subsidy could hurt them.
In minerals, the domestic excavators will benefit due to the higher landed cost of imported minerals. However, importers of mineral swill get impacted but will remain protected as far as the prices of the finished goods move up in tandem.
In electronics, India is normally a large importer and hence the manufacturer will face higher costs which will be needed to be passed over.
India is a net importer of $38.6 bn as far as electronics is concerned. India imports 65 percent of its electronic needs, mostly from China, which accounts for over a quarter of the country’s trade deficit.
India’s short-term debt obligations as on Dec 2017 were to the tune of $217.6 billion. Assuming half of this due for repayment over the next 1-2 quarters, and extra outflow of Rs.65,000 crore will be required considering an average 9.5% depreciation in the value of the Rupee.
As far as the effect of falling Rupee on Govt finances is concerned, the depreciation in the value of Rupee will create a pressure on oil import bill and in turn on fuel prices (and pressure on Govt to reduce taxes creating problems for fiscal deficit), will lead to higher borrowings by the Govt, will increase inflation (due to higher fuel costs, higher landed cost of imports and higher interest costs in the system), will impact consumption growth thereby impacting rate of economic growth.
Some experts are debating on the fact that the current rally of 2018 which took the indices to all-time higher is boring and the worst since 2008 because only 63 NSE 500 companies hit lifetime highs compared to over 200 in 2008?
The situation is different now compared to 2008. Then we had a massive inflow from FIIs which led to most scrips doing well whether with or without merit. Regulation at that point in time was not as strict as now.
In the current circumstance, only companies that have passed the test of demonetization, GST upheaval, SEBI diktats, and debt repayment capacity have done well. Quality has become more expensive with investors fearful of taking a bet on commodity companies as well as companies that do not have any moats.
Disruption in a whole host of sectors has resulted in uncertainty on business models of some companies and difficulty in predicting earnings trajectory of quite a few companies.
Further PSU as a sector continues to underperform due to the fact that minority interests are not always kept in mind while taking policy decisions in these companies.
Investors have become choosy about governance and capital allocation decisions made by the companies’ management. Many small-cap and mid-cap companies may fail the test of survival in an era of constant disruption – be it owing to regulations or technology.
Talking about 2008, we are approaching the 10-year anniversary of Lehman Brother bankruptcy. Any incident which you can recall from 2008 and your learnings from the event. Even a small amount invested in the 2008 crash would have made many crorepatis in just 10 years.
Some lessons learned from the Lehman episode include:
Buy and hold works for investors. Eventually provided you have done enough due diligence on the stocks. Paper losses are real-life painful.
Not selling your stocks late in a bear is one of the hardest things to do. But, also essential. The old cliché is true: It’s always darkest before the dawn.
While stocks recovered relatively quickly, investors didn’t recover emotionally at least. They continued to fear “the next Lehman” lurking around every corner.
Auto loans, student debt, Greece, Brexit, U.S. deficits — all became suspected Lehman repeats. Today, people fear European banks, debt loads and tariffs.
This has precluded many investors from benefitting out of the latest bull market. The lesson that we should have learned is … whatever we can do to keep our emotions out of investing, the more the better
A lot of investors learned painfully that leverage can mean that your equity can go to zero. The price you pay for stocks matters.
There is no such thing as a “conservative” or stable stock. Liquidity matters a lot..illiquidity kills in downturns.
Both the Sensex and Nifty are trading at their all-time highs. Some experts are fearing a fall of about 10% and even the upside remains fairly limited. What are your views?
Considering the peak valuations, a correction is expected. However, it is difficult to predict the time of its onset. In the meanwhile, the indices could climb to higher levels.
However, if corporate earnings start showing up in Sept-18 numbers, then that should lessen some concerns on the market’s valuation front.
Investors need to look out for quality stocks with earnings visibility, superior management, and low operating margin variability.
Mid-and-small-cap companies will keep throwing up surprises in stock moves, based on their small size/base, faster adjustment to emerging changes, financial and operational restructuring, corporate announcements including mergers, demergers, hive-offs, turnaround, asset value unlocking etc.
This space will give investors alpha at a time when the large-cap funds have found it difficult to replicate returns of their benchmark indices. Focus on companies that have the capability to sail through their business cycles without being affected by short-term market volatility.
Till the elections are out of the way, the market will throw up a lot of opportunities to accumulate small/mid-cap stocks to generate outsized returns post the elections.
The recent sharp fall in mid-and-small-cap stocks has not only added to the overall market volatility but has also expanded investment opportunities given steep valuation corrections in select stocks.
Investors are seeking the safety of high quality, low capital intensity, and high earnings visibility companies, even at higher valuations.
Retail investors should learn from market moves, and may also want to upskill themselves regarding the ways of the markets, and individual stocks’ financials/valuations.
A staggering investment in direct equities/mutual funds may result in lowering their risks, in an era when the world is witnessing a paradigm shift in business models and the valuations assigned to them.
FIIs have been sellers in recent times while domestic retail investors are filling the shortfall. Do you think the momentum is likely to continue?
Over July, Aug and Sept (till date) FIIs have been small net buyers in the Indian equity markets. They were large net sellers in the previous three months.
Local investors pumped in Rs.5923 cr in equity mutual funds in August 2018, the lowest amount in 19 months. If one excludes SIP inflow of Rs.Rs.7658 cr, they have redeemed Rs.1735 cr worth of equity funds in August.
Local inflows can be volatile and may not be relied upon fully to offset FII outflows in case the FIIs start taking a very negative view of all emerging markets including India.
FPIs have trimmed their India weight to 2011-lows. India's outperformance could cause FPI flows to return. Based on interest rate moves abroad, we may witness the resumption of foreign interest in Indian equities/debt in Q1CY19/Q2CY19.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.