Markets are expecting a lot from the budget and any disappointment can derail the market momentum, so can the failure of the economy to pick up in the fourth quarter, says Hemang Jani, Head– Advisory, Sharekhan, in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: The market rallied more than 12 percent in 2019 on the back of measures taken by the government to boost the economy and positive global cues. Do you expect the momentum to continue in 2020 and will the Nifty surpass 14,000?
A: The corporate tax rate cut and a turnaround in corporate-lending banks could boost earnings growth in FY2020 and FY2021, which is likely to support positive momentum of markets.
Q: Banking and financial services led the charge in 2019 on hopes of easing NPA worries and strong growth. Do you feel the sector will continue to perform and what are challenges?
A: We believe bulk of the incremental profits of the Sensex companies will be contributed by a turnaround in corporate-lending banks like ICICI Bank, Axis Bank and State Bank of India over FY20-21. So there is good probability that banking and financial services will continue to do well in 2020, led by improved performance from ICICI Bank, Axis Bank, SBI & HDFC Bank. Unexpected rise in NPA (non-performing assets) and provisions could turn out to be a dampener for markets.
Q: The primary market saw fewer IPOs in 2019 than 2018 and half of them gave double-digit returns. What are your thoughts on the primary market for 2020? Do you see more IPOs in 2020 and which are those?
A: Though lots of IPO are lined up, sailing of IPOs will be depend on two main factors: first is pricing of the issue and the second is the market scenario (sentiments). If market scenario continues to remain positive, then we may see more IPOs than 2019. Just to name a few companies which have lined for IPOs are SBI Cards, Burger King, HDB Financial, IREDA, National Insurance Company, India Railways Finance Corporation, Equitas Small Finance Bank etc.
Q: More than 35 stocks, including well-known names, rallied more than 50 percent in 2019. What are the top six stocks that you feel will return more than 50 percent in 2020?
A: Some of the stock which we like and which can deliver decent returns in 2020 are Vinati Organics, Varun Beverages, Trent, Aarti Industries, Bajaj Holdings and V-Guard Industries.
Vinati Organics: The company operates in niche segments and has an exceptional product basket, with a significant market share in its product categories globally. The company is, therefore, able to generate significantly higher margins. It also has a lean balance sheet (is debt-free) that helps Vinati generate superior return ratios.
Varun Beverages: With sustenance of strong organic double-digit volume growth in the domestic business, incremental sales volume from newly acquired territories and robust performance by international territories, we expect VBL's revenue and earnings to report CAGR of 21.2 percent and 35.6 percent over CY2018-CY2021, respectively. We have introduced CY2021 earnings in this note. Further, if VBL opts for lower tax rate (decision will be taken by Q4CY2019), it will add to the company's earnings in CY2020 and CY2021. Foreign investors are also showing interest in the stock, as the foreign portfolio holding in the stock increased to 19.2 percent in September 2019 from 13.5 percent in March 2019. With growth momentum expected to sustain, we maintain our positive view on the stock with 23-25 percent upside from current levels.
Trent: It is a leading branded retail company with pan-India presence. Westside is the main stay of Trent's retail business, offering exclusive range of its own branded fashion through 150 stores (2.7 million square feet) in 76 cities in India. Private brands contribute almost 100 percent to Westside's total revenue, which is one of the key differentiating factors compared to other branded retail companies.
Aarti Industries: The company remains among our top investment bets, as growth levers in respect of multi-year high-margin contracts will start to play out in 12-18 months. Management guided for 10-15 percent rise in PAT for FY2020. We introduce FY2022E numbers and expect Aarti to report revenue and earnings CAGR of 19.3 percent and 25.4 percent over FY2019-FY2022E, respectively.
Bajaj Holdings and Investment: BHIL holds Bajaj Group's investments in two flagship companies—Bajaj Auto (BAL – 35.77 percent stake) and Bajaj Finserv (BFS – 41.63 percent stake). BHIL also has an investment portfolio with a market value of around Rs 7,000 crore in other equity and fixed income securities. Given the strategic nature of BHIL's investments (BAL and BFS), we have given a holding company discount to its equity investments. Liquid investments have been valued at cost. Consequently, price target for BHIL stands revised to Rs 4,654.
V-Guard Industries: We retain buy on V-Guard with a revised price target of Rs 285 factoring improvement in OPM, gradual recovery in consumer demand and favourable commodity prices.
Q: What are major events to look at in 2020 as most experts feel the recovery is expected to happen in earnings as well as economy?
A: US elections, Brexit, US–China trade deal, budget and state elections in India are the key events to watch out for in 2020. Any adverse outcomes are likely to create volatility in market.
Q: What are key challenges/risks (global as well as domestic) for the market in the new year?
A: Some of the big challenges for the economy, which can have repercussion on market, include weak investment, muted monetary transmission and slow GST collections. Although monetary policy committee has kept interest rate unchanged in the latest policy, its taking accommodative monetary policy measures to address the economic slowdown. The government has recently announced a slew of measures, including cut in corporate tax rate, capital infusion into public sector banks, setting up a Rs 25,000 crore fund to boost realty sector, among others, to boost the economy.
Q: What are the factors that can spoil or derail the market momentum in 2020?
A: Markets have lots of expectation from this budget and any disappointment in the budget can derail the market momentum. The government has a huge task to keep the fiscal deficit in given target and cut the taxes. Also market are expecting a pick-up in the economy from the fourth quarter, if that gets delayed, then it may have an impact on the market.
Q: Most experts believe broader markets (midcap and smallcaps) to gain strength and outperform frontliners in 2020. What are your thoughts?
A: The NSE Midcap index is currently valued at 15x its underlying earnings on a one-year forward basis, a significant decline from a price-to-earnings multiple of 20x a year ago. The discount in valuation of mid-caps versus large-caps is close to multi-year highs. Among midcaps, it makes sense to go for structural growth stories, where companies are available at a reasonable valuations.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.