Arun Thukral, Managing Director and Chief Executive Officer of Axis Securities, said in an interview to Moneycontrol that when on the lookout for multibaggers, identify a company with a vast business opportunity available to be tapped and managed by a capable and visionary management.
The RBI maintained its status-quo stance this time and reduced SLR by 50 bps. The actions do not suggest a fiscal stimulus at this point in time. Do you see a stimulus or a rate cut happening in 2017?
We expect a rate cut of 25 bps over the next 6 months given the low inflation which trends in comfort zone of the Reserve Bank of India (RBI). We do not see a deeper cut as it will breach the real interest band to be maintained by RBI.
Moreover, the central bank’s projected inflation has gone up to 4.2- 4.7 percent compared to the last policy which indicates upside risks to the inflation in the near future.
The combined fiscal deficit (centre plus state) has reached 6 percent. Hence, there is limited room for fiscal stimulus, given the rise in the government’s expenditure till date and if the government is intending to tread the path of fiscal consolidation.
The core IIP numbers for August 2017 reported an improvement to 4.9 percent growth which is a healthy sign. The possibility of cycle turnaround cannot be negated but we have our fingers crossed. We don’t think that the government will take any step to deviate from the fiscal prudence.
What is your approach to identifying a multibagger? In the current scenario, which are the sectors which can produce multibaggers over the next 4-5 years?
Multibaggers evolve over a period and cannot be identified at one go.
A- When you are on the lookout for the multibaggers, identify a company with a vast business opportunity available to be tapped and managed by a capable and visionary management.
B- The business should have a deep entrenched moat which would offer the pricing power to it.
These two parameters would decide the exponential growth required for a company to become a multibagger and its ability to withstand the perils in future, thus ensuring longevity to the business.
C- In addition, the management, which is looking into the day-to-day business of the company, should be ethical and have a good understanding of the business.
D- The opportunity must be identified at infancy so that one does not end up paying premium valuation.
E- Finally, one should have conviction on the investment idea and patience to hold on to the stock till the fruits are realised.
The financial inclusion undertaken by the government has opened up a vast opportunity to cater to the financial needs of the underpenetrated bottom of the pyramid segment of the society.
Given the business opportunity offered by financial inclusion, we feel the financial sector has the potential to produce multibaggers over maybe next decade or two.
Similarly, the disruption caused by the non-renewable energy sector and electric vehicles also has potential to produce multibaggers.
The first half of FY18 is over and the S&P BSE Sensex rose just over 6 percent and for the year it has gained a little over 18 percent. The large part of the rally was led by small and midcap stocks. What is your view on the broader market — should investors book profits in small & midcaps?
The market rally is the testimony to the strength of the economy. The reforms were undertaken in the recent past be it demonetisation or GST would be instrumental in shaping the quality of growth in future.
Coupled with other reforms viz., implementation of Aadhaar, IBC and Jan-Dhan Yojana, the economic progress would be all-inclusive and positively impacting each and every individual in the country thereby leading to improvement in the demand-driven consumption.
Rising overall consumption would help improve corporate earnings. The markets are expecting robust earnings growth from H2FY18, thereby keeping the markets upbeat.
Mid and smallcap stocks have rewarded investors handsomely in the recent past. An investor should undertake a detailed study before investing in small and midcap stocks.
Once convinced, an investor should set a target based on the fundamentals and accordingly book profit once the target price is reached.
One should keep booking profits in mid and small caps as these stocks are vulnerable to sharp corrections once the tide turns.
Slipping macros is something which is troubling market participants at the current juncture. Do you think this will cap upside for Indian markets or these fears are unfounded?
We are of the opinion that the government is unlikely to undertake any step which would undermine the macroeconomic stability. We believe that the government is committed to walk on the path of fiscal consolidation laid down by the NK Singh committee.
Moreover, the core IIP numbers for August 2017 have reported a robust 4.9 percent growth which indicates the probable turnaround in the economy. If the turnaround is converted to reality, there would not be any need for a stimulus.
September quarter earnings will kick off later this month. Do you expect a recovery in earnings in this quarter?
The second quarter is likely to be muted given the transition of indirect taxation system to GST. The corporate earnings growth is expected to gain momentum from H2FY18 on back of good rainfall and pent-up demand driven consumption followed by robust growth in FY19.
Demand is expected to bounce back on account of two consecutive good monsoons- 2016 and 2017. A good rainfall in monsoon 2018 would be an icing on the cake.
With the implementation of the Insolvency and Bankruptcy Code, the Non-Performing Assets issue of Public Sector Banks is likely to improve, thus enabling them to concentrate on loan book growth than provisioning the existing accounts.
Improvement in demand will help the enhanced utilisation of capacities thus calling for private capex investments which will happen over next 15-18 months. We expect corporate earnings to grow at CAGR of 15 percent over the next two years.
What is pushing foreign investors away from Indian markets? They sold about Rs 11,000 crore from Indian equity markets in September.
The foreign institutions have sold due to a couple of reasons a) geopolitical tensions b) pre-empting expected risk aversion following the US Fed balance sheet trimming and ECB QE winding up and c) the improving economy in the US given the delay in earnings recovery in Indian markets.
But the selling from FIIs has been more than absorbed by the domestic institution backed by robust flow from Indian retail investors who have recognised the potential of Indian economy and are investing through the regular MF SIP route. Hence, the selling by foreign institutions is not a big worry.