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DAILY VOICE | Nimish Shah of Waterfield Advisors suggests creating core portfolio of good quality auto ancillary stocks post PLI scheme

Given the current economic traction across various industries, we expect Nifty company earnings to grow at an average of 12 percent per annum over the next 3 years.

September 22, 2021 / 08:09 AM IST

Nimish Shah, Chief Investment Officer - Listed Investments at Waterfield Advisors advised caution for investing fresh money into metal stocks, especially after stellar run in the sector.

"At these valuations, the stock price upside from here-on is capped. A further increase in metal prices would hurt user industries. Demand will also diminish if the metal prices increase further," said Nimish who has close to 25 years of resourceful experience in Capital Markets across diverse asset classes and platforms, and his area of expertise extends, but not limited, to providing investment advice and financial planning solutions.

After the government announced nearly Rs 30,000 crore of production linked incentive for automobile sector, he suggest creation of a core portfolio of good quality auto ancillary stocks over time.

On the current issue in the auto sector, he said semi-conductor issue is here to stay for some time. "Most original equipment manufacturers (OEMs) have announced production cuts due to shortages. We believe that this is transitionary and could provide an opportunity to enter automobile sector through ancillary companies that cater to Indian and export markets."

Q: Evergrande crisis rattled investors’ sentiment globally. Do you think it will be a bigger cause for correction across the globe including India in coming days or it is a short-term concern?

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Evergrande is one of China's largest real estate developers and has over 1,300 projects in more than 280 cities across China. The group has also diversified into various non-related businesses like electric vehicles, theme parks, bottled water, beverages and groceries. It is also the most indebted real estate developer in China with over $300 billion of loans. Over 125 banks and various other financial firms have loan exposure to Evergrande that includes the likes of Blackrock, UBS, HSBC, Goldman, Fidelity and Amundi apart from many local banks.

Over the last few weeks, Evergrande has warned investors of cash flow issues, saying that it could default if it's unable to raise money quickly. They have around $670 million coming up in coupon repayments coming up in CY21 with nearly $83 million coming due in two days - September 23, 2021. The issue of Evergrande could remain local as China's market is controlled by its retail investors. Few global institutions have a significant exposure to Chinese property developers or Chinese real estate.

Most of Evergrande debt is to Chinese banks. However, due to contagion through commodities and financials, we might see a spiral to other sectors and geographies. A lot would also depend on how the China government responds to the upcoming liability of interest payment after two days. If a relief or moratorium is provided, then it would surely be a positive sign. However, if they don’t and allow the company to fail to send a message to other large borrowers, then we could see the contagion effect play out.

Q: Do you think the Federal Reserve can announce tapering in its upcoming policy meeting later in the September?

The probability of the Fed announcing immediate tapering is low. The growth, interest rate and inflation dynamics do not yet suggest an announcement this meeting. Fed has surely warmed up to the idea of an early tapering that could start by the end of 2021. However, slowing down of the economic recovery and lower employment numbers will weigh in on decision makers as they give a verdict on Wednesday. It is expected that the Fed would give some clarity on when the tapering could commence.

Q: Considering the expected economic & earnings growth, do you think the BSE Sensex and Nifty can be doubled from current levels by 2025?

It is not possible to predict the Sensex and Nifty levels for any time – short- or long-term period. However, there is visibility of earnings from good quality companies for the next 2-3 years. This gives an expected trajectory of the growth in earnings and that in turn gives us a perspective of how the stock price could move basis an average or long-term valuation. Given the current economic traction across various industries, we expect Nifty company earnings to grow at an average of 12 percent per annum over the next 3 years.

Q: Have you spotted any themes which have to be part of the portfolio from here on, and why?

At the current valuations, sectors like financials, automobile ancillaries and IT are expected to do well. We would also suggest staying invested in largecap stocks of these sectors.

Q: Finally the government announced a moratorium of four years on payment of adjusted gross revenue (AGR) dues for the cash-strapped telecom sector. How will this moratorium help the sector and do you think it can solve the problem of the sector? What should be done to solve the sector's crisis?

Deferment of the AGR dues by four years was the much-needed relief for the sector with only 3 players. With high debt levels and low margins, the telecom sector faces a struggle to stay afloat and this moratorium should surely help overcome the cash crunch and provide funds for technological upgradation through bidding for 5G spectrum.

While Airtel and Jio would also benefit, relief to Vodafone's cash crunch situation would give it some breathing space. The dues, especially for Vodafone at approximately Rs 1 lakh crore, is quite large and the deferment would surely provide some breathing space. Given the circumstances, this is a good interim relief package that could help telecom companies ease cash flow pressures and give them space to raise capital and make investments in the ever-evolving technological developments.

Q: Several experts expect the bullish trend to continue for atleast next couple of years to four years. Do you agree with their view and why?

The growth factors for the economy seem to be firmly in place. Most industries have strong growth projections for the next 2-3 years and hence the view does remain positive on the overall economic growth of the country. Markets have already discounted the expected growth in top and bottom lines of such companies and the same is being reflected in the high valuations.

If the earnings toe the expectations, markets could remain positive. However, a time or event-based correction would help markets in the longer run and give a reasonable level for it to consolidate and then rise.

Q: Metals sector was the biggest outperformer in FY22 so far with 44 percent gains. Do you think the rally can extend further in coming weeks or is it the time to be cautious on the segment?

Investments in metals require a different mind-set. It is a cyclical industry and volatility is high. At these valuations, the stock price upside from here-on is capped. A further increase in metal prices would hurt user industries. Demand will also diminish if the metal prices increase further. We would be cautious to invest fresh monies in this sector at this stage.

Q: Will the chip shortage issue be a spoiler for the auto sector in the current festive season? Also what is your view on the PLI scheme announced for the sector? Is it the time to add these stocks to portfolio?

Semi-conductor issue is here to stay for some time. Most original equipment manufacturers (OEMs) have announced production cuts due to shortages. We believe that this is transitionary and could provide an opportunity to enter automobile sector through ancillary companies that cater to Indian and export markets.

Capital availability to good quality companies that want to expand due to demand requirements has never been a constraint. The government’s intention to increase the contribution by the manufacturing sector to the country’s GDP is driving the production linked incentive (PLI) and is very well intended. The PLI schemes would benefit certain segments of the industry like the electric vehicle parts, hydrogen fuel cells technology and electronic parts of two and four wheelers. This should help increase indigenous production to meet local and export requirements and generate employment. We suggest creation of a core portfolio of good quality auto ancillary stocks over time.

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.

Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
Sunil Shankar Matkar
first published: Sep 22, 2021 08:09 am

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