The Bajaj twins are more susceptible to further correction, while the HDFC twins should deliver stable performance in the coming quarters, Amar Ambani, President-Head of Research, YES Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Q) The most important question which everyone is asking is when will be bottom out? There are no positive surprises from the earnings, the economy is showing signs of a slowdown, and corporate governance issues keep cropping up.
A) The earnings yield in equities should support the Nifty at some point. The Nifty may even rise on the back of a handful of stocks, as has been the case for a while now.
However, given the pain pervading the broader market, the bottoming out process will take time. Sadly, many niggles have ballooned into big concerns, and new headaches have emerged in recent months.
Liquidity and credit availability issues have been a drag on the economy for a long time now, and even multiple rate cuts have not helped their cause either.
Domestic consumption, which is holding up economic growth, has hit a cyclical downturn after several years of a falling savings rate.
Revival in the private-sector investment seems remote because of credit hassles, demand issues and drop in animal spirits.
There is a perception gaining ground that following the initial success in the form of a few low-hanging fruits, the bad asset resolution process has slowed down.
The cautious commentary by a set of private banks, which were unaffected so far, hasn’t helped either. Fears of an encroaching slippage cycle in the retail consumer credit loom large.
Government capex (capital expenditure) has held up so far, but factoring in both the on-balance sheet and off-balance sheet borrowings, there seems a risk of further crowding out of the private sector.
The super-rich tax has impacted the sentiment of UHNIs (ultra-high net worth individuals) and FPIs (foreign portfolio investments). Discernibly, socialist positions calling for further job reservations in the private sector and attempts to cancel legacy government contracts in certain states also does not bode well.
Given the weak logistics activity, as reflected by the lull in freight traffic across roads, rail, shipping and even at ports, GDP growth may drop lower before it recovers.
My sense is that the market has entered a long consolidation phase following the buoyant rally that reigned from 2013-end till 2017. The year 2018 was that of a big fall, and 2019 is likely to be another year of consolidation that should last till some point in 2020. The second leg of an upswing seems likely only in FY21.
Q) What do you make of the earnings that have come so far?
A) The result season hasn’t been encouraging, so far. Revenue growth has suffered a multi-quarter dip on account of the auto sector lag, besides the strain caused by other consumption companies.
Tata Motors and Vodafone losses have been a major drag on the already slow earnings. Our sense is that it could get worse as the season progresses.
However, on the bright side, the financial sector earnings are improving notwithstanding the gloomy commentary.
Q) What do you make of the auto sales numbers for July?
A) We expect auto sales to remain weak in July 2019. While inventories have been corrected through OEM (original equipment manufacturer) production cuts, our recent channel checks hint at further deceleration in the retail demand.
In the passenger car space, given the weak inquiries, we expect double-digit declines for all listed players. The CV (commercial vehicle) segment has been hit hard by a multitude of factors: economic slowdown, lower freight rates, higher fuel prices and NBFC crisis.
Consequently, sustained weakness in retail volumes is imminent; hence we expect a 20 percent decline in industry volumes.
Q) How is August likely to pan out for investors? What are the important events to watch out?
A) Though a month-by-month market prediction is invariably difficult, we should hopefully see a semblance of a respite in August, after a largely forgettable July.
The market expects a few decisive steps from the government towards damage control. If it happens, sentiments would get a boost.
Marketmen keenly await the quarterly GDP data. Scenarios of the RBI cutting rates and helping improve credit availability are among the key hopes.
Q) In July we saw a glimpse of selling in top largecaps names, which is not a positive sign if you are a bull. Which will correct the most, the HDFC twins (HDFC Bank and HDFC Ltd) or the Bajaj twins (Bajaj Finance and Bajaj Finserv)?
A) The Bajaj twins seem more susceptible to further correction. The HDFC twins should deliver stable operating performance in the coming quarters notwithstanding the external challenges, thanks to their relatively undemanding valuation, controlled growth in recent years, limited exposure to vulnerable consumer financing segments and access to stable and low-cost funding. Bajaj twins, too, have a robust business model but they could exhibit higher cyclicality.
Q) It looks like things are changing fast on Dalal Street. What is your advice to investors? How can they decide what stocks to keep and which ones to sell out?
A) Firstly, investors must immediately exit companies plagued with governance issues and regulatory overhang, even if at a loss.
Secondly, they should ensure a margin of safety across their portfolios. In the present scenario, anything that’s expensive on FY20 numbers is at a price risk. Even institutional investors wouldn’t want to take a chance with FY21-22 estimates in an uncertain economic scenario.
Last, but not least, the evergreen rule is to own stocks from sunrise industries, those blessed with excellent management with a growing competitive edge and an eye for disruption and innovation.
Investors shouldn’t hesitate to sell if the industry or company has sticky challenges or the competitive position is under threat.
Q) People have forgotten the word ‘multibagger’ in 2019 which was a popular word before 2018. But, given the extent of fall, this might be the right time to look at stocks that could eventually turn out to be multibaggers as the tide reverses. What are your views?
A) It’s a good sign that people aren’t looking up the keyword ‘multibagger’ on the web anymore. This trend shows that market greed has abated, and caution (read fear) has taken over.
However, it doesn’t mean that all will be hunky-dory about investing henceforth. Only after a period of consolidation, small and mid-caps will resurface to relish good times again.
Given a three to five-year time horizon, stock nibbling won’t be such a bad idea, especially if done in a staggered manner. But, since the same set of midcaps and small caps, which zoomed between 2014 to 2017, may not lead the next rally, it’s better to wait for the dust to settle in this segment.
For now, with bad news floating around and more pouring in by the day, our bias would be towards well-established names.
Even holding cash seems a great option. The problem is that I don’t know of anyone who has free cash anymore, given the hit across all asset classes: equities, property and even FMPs.
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.
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