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Last Updated : Oct 14, 2020 08:09 AM IST | Source: Moneycontrol.com

DAILY VOICE | Banking sector is cheapest, accumulate stocks with a 2-3 year view: Rusmik Oza of Kotak Securities

Investors need to be careful going forward as the Nifty-50 is again moving closer to its previous peak. Structurally, our markets are still in a bullish phase as the Nifty-50 sustained above the 200 DMA in the recent correction.

Banks are valued on a price-to-book value basis. On a trailing basis, the Nifty Bank Index is trading at 1.6x as compared to its ten year low of 1.3x and the ten-year peak of 3x. The banking sector is one of the cheapest, which makes a case to accumulate stocks in the sector with a 2-3 year view, Rusmik Oza, Executive Vice President, Head of Fundamental Research - PCG, Kotak Securities, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:


Q) After a muted September, October started off on a positive note. But, most experts are advising caution after much ‘Hated Rally’. Why we say that because fundamentals are not supporting the conviction seen in the market. What are your views?

A) Most lead indicators we monitor have shown sharp improvement in the month of September raising hopes of faster normalcy. The uptick in September is a combination of genuine uptick coming from pent-up demand and inventory push from manufacturers into the system before the festive season.

We are now in a critical phase of India's recovery - high-frequency data shows that many segments of the economy are moving and are reaching close to 70-80 percent of pre-COVID levels.

Demand revival is crucial to sustaining the green shoots in the economy. From a stock market perspective, the risk-reward balance is muddled at current prices with the Nifty-50 trading at 21.5x on a 1-year forward basis.

Investors need to be careful going forward as the Nifty-50 is again moving closer to its previous peak. Structurally, our markets are still in a bullish phase as the Nifty-50 sustained above the 200 DMA in the recent correction.

It could remain in a wider range of 1000-1200 points because of higher VIX levels. This month’s expiry is on 29th October which is just 5 days before the US Presidential elections scheduled for 3rd November. Hence, expect higher volatility and swing similar to what we saw in September during this expiry also.

Q) What is our call on banks especially PSUs? Do you think it is best to avoid them in the portfolio (even SBI) and stick with private sector players as well as NBFCs?

A) We are bullish on the banking sector but prefer Private sector banks over PSU banks. In PSU banks we have preferred only SBI and Bank of Baroda.

The government’s stance in the moratorium case is a big relief to individuals & MSME borrowers. It also provides some clarity to the banking sector. The forthcoming Supreme Court verdict should remove the uncertainty factor surrounding banking stocks and we can expect some clear direction in Nifty Bank Index thereafter.

On valuations, the banking sector is one of the cheapest which makes a case to accumulate stocks in the sector with a 2-3 year view. The Nifty-50 has risen 54 percent from its recent low and is just 6 percent away from its 52-week high.

In comparison, the Nifty Bank Index has moved up 40 percent from its recent low and is still 30 percent away from its 52 week high.

Banks are valued on the Price-to-Book Value basis and on a trailing basis the Nifty Bank Index is trading at 1.6x as compared to its ten-year low of 1.3x and the ten-year peak of 3x.

The average one-year upside of 18 banks that we cover works to 50 percent. All the front line private sector banks and select old private sector banks falling in the mid-cap category look appealing.

Q) September month auto sales numbers suggested green shoots. Do you think the time has come when investors can go overweight on this?

A) Auto sector volumes continued to recover across segments in September 2020 led by inventory push by OEMs to fill up channel inventory before the festive season and improving retail sales trend supported by pent-up demand.

FY21 would be a washout year for the automobile sector with a strong comeback in FY22 on the lower base. Based on the earnings growth profile and valuations we are positive on two-wheelers and tractor companies.

In the passenger vehicle segment, there is only one company that is Maruti Suzuki. We are negative on Maruti Suzuki due to rich valuations. We would like to stay away from commercial vehicle stocks due to the steep rise in diesel prices and sub-optimal economic activity.

We recommend Bajaj Auto and Mahindra & Mahindra in the auto space. Our target for Bajaj Auto is Rs.3,400 and that of M&M is Rs.725.

Q) We have seen an IPO frenzy in September, and we hope that it continues in October as well. When someone is investing in an IPO – what should be the thought process? Does he/she hold it for long term or at best a trading play? What the factors which one should analyse before putting money in an IPO?

A) We had a dry patch in between as most IPOs got deferred due to correction in the market. After the sharp rally and broad-based recovery in the mid and small-cap space, there is an appetite for new offerings.

The success of recent IPOs in terms of oversubscription and listing gains indicate we would see more IPOs hitting the market. While investing in IPOs one should do the same due-diligence that one does while investing in the secondary market.

If the future outlook of the company is very bright with sound management then one can look at holding the stock for the long term. For example, since listing in 2004, TCS stock price has compounded at 22% in the last 16 years. Great companies that get listed should be kept for the long term.

If one is not comfortable with the long-term outlook of any company then it can be sold if there are hefty listing gains. While investing in IPOs one needs to read the Red Hearing Prospectus and go through the company presentation, if available.

Following key things need to be checked in the Prospectus: 1) Major risk factors, 2) Promoter background and management team, 3) Key strengths of the company, 4) Financial summary & comparative valuations, and 5) Objects of the issue & shareholding pattern after the IPO.

Q) We have entered the last quarter of the calendar year 2020, and hopefully it could bring respite to the economy. What are your expectations from the December quarter in terms of COVID, Crude oil, Rupee, stock markets, earnings, global recovery, NPAs, and not to forget GOLD?A) December quarter is going to be volatile as we have the US Presidential elections, the outcome of which will have repercussions on global markets. As we approach the winter season we need to monitor whether there is any strong second wave of coronavirus in the US and Euro region.With recovery picking up pace across the globe and winter approaching we can expect crude prices to go up in the December quarter. Brent crude price can potentially go to ~USD50/bbl or above in this quarter.The biggest challenge for the global economy is the pandemic which is still out of control as is evident from the rising cases globally. Unless the virus outbreak is controlled and the global economy is on a stronger footing, investors may continue to put their money in safe havens like gold. ETF buying has been one of the key factors supporting gold.After months of gains, gold is showed the first signs of correction recently. Looking at the buying that is emerging in gold at declines we can expect it to remain in the range of US$ 1800-2100/ounce in this quarter.For FY21E we estimate current account surplus at 1.1% of GDP and BOP surplus at US$94.4 bn. On the currency side we expect USD-INR in the range of 72-75 through the rest of FY21.

Based on our economists’ forecasts, we are expecting GDP de-growth to improve from (-) 23.9% in Q1FY21 to (-) 15.7% in Q2FY21 to (-) 5.7% in Q3FY21 and (-) 1.6% in Q4FY21. The earnings trajectory will also improve similarly on a sequential basis in the coming quarters.

On the Equity side, we expect Nifty-50 to trade in a wider range of 1000-1200 points till the outcome of US elections (i.e. 10,600 to 11,800). Any break beyond these ranges maybe post US elections can determine the future course of the market.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are 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.

First Published on Oct 14, 2020 08:09 am