Exclusive interview of Vinod Nair, Head Of Research at Geojit Financial Services to Kshitij Anand of Moneycontrol.
Post the dismal Q1 results we have reduced our target for Sensex from 32,500 to 31,000 for March 2018, Vinod Nair, Head Of Research at Geojit Financial Services, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) Where do you see markets headed in the rest of 2017? We are unlikely to see a repeat performance of H1 but do you think we will be able to hold 10K on Nifty and 32K on Sensex by December?
A) Well, post the dismal Q1 results we have reduced our target for Sensex from 32,500 to 31,000 for March 2018. This is due to a cut in the earnings forecast of Sensex index from 15 percent to 10 percent, led by (-7) percent de-growth in PAT for Sensex companies against an estimate of (-1) percent.
At the same time, consensus EPS growth (Bloomberg) has come down from 20 percent to 13 percent for FY18. During H1 2017, the market had a strong performance led by liquidity, reformist ideas, reduction in political risk and hope for earnings growth.
Whereas, the recent economic data is subdued impacting the outlook for the economy, not supporting earnings growth in the near-term. Given lack of any domestic triggers, the performance of India is likely to skew in-line with the performance of the global market.
Q) What are your views on Infosys and the IT sector? The bad news doesn't seem to end for India’s second largest software exporter? What is your stance and do you see it getting murkier?
A) Currently, we have a ‘Hold’ rating on the stock, given the disruptive developments in the global IT business. Based on recent financial numbers, we can understand that the business issues are under work-in-progress with any lack of remedies in the near-term impacting the outlook at least over the next 2 to 4 quarters.
At the same time, the collapse in the confidence between the promoters and the board will have a further hazardous impact on the valuation of the stock.
The buy-back plan can provide a support in the short-term, given recent disruptive events, SEBI may check the proposal. As far as for institutional investors, it may not be a remedy given low acceptance ratio.
But, for retail investors, there is an opportunity to participate in the buyback scheme for benefit in the short-term.
Q) There is a lot of news brewing around the pharma sector? What is your call on the sector and what should investors do if they are holding a substantial amount of their portfolio in funds or stocks?
A) Pharma sector will be on a negative note for at least 3 more quarters. Pricing pressures from the US, channel consolidation, USFDA inspections and high competition will be a concern for the industry in the near future.
And in the latest quarterly results showed the impact of de-stocking due to GST implementation by way of reduced sales.
Though the industry may have reached near the trough of their business cycle, it is expected that it will take few more years for a solid recovery.
Besides the recent proposal of the Central government to bring pricing power under their gambit, if implemented, could increase costs to pharma companies whereby reducing margins and increasing pressure on pricing.
But, a resultant increase in quality of medicines and pricing efficiency may reap benefits for pharma stocks in the long term. Be stock specific and existing investors can hold on to good quality stocks within the pharma space.
Q) The small and midcap stocks which saw a knee jerk reaction earlier in the month of August have bounced back sharply. Do you see a bubble in the small and midcap space?
A) The domestic market had taken a swift and sharp hit due to SEBI’s crack-down on shell companies and geopolitical tension between India & China and USA & N. Korea.
In the last, two to three weeks Sensex declined by 5 percent while S&P BSE Mid-cap & Small-cap were down by 7 percent from the all-time high to the recent low.
The market has a very rational view that the geopolitical issue will be neutralised or maintained as a status-quo. Regarding the SEBI issue, it has impacted the liquidity of domestic traders but will never impact the prospects of authentic investors.
In consequence of both, the domestic market has taken a hit, by underperforming the MSCI-EM and developed economies like the US. Going forward the performance of the small and mid caps will be under pressure due to strong performance in the last 6 to 7months, a lofty valuation and lack of earnings growth.
Q) What is your mantra which you give to your clients to achieve their dream of becoming a crorepati?
A) Stick with quality, follow research idea with a long-term view, reduce churning but assess the outlook for your stocks and sector on a continuous basis. Always have a SIP, based on its historical performance and objective.
Q) Any top stocks which you think have to the potential to become multibaggers in the next 2-3 years and why?
A) Here is the list:
BEL will emerge as a key beneficiary from on-going defence modernisation programs & GoI focus on indigenisation. The current order backlog of Rs40,000cr is 5.3x FY17 sales, which has significantly improved the earnings outlook.
We factor order book to grow at 15% CAGR, consequently, earnings are expected to grow by 14% CAGR over FY17-FY19E. We value BEL at P/E of 22x on FY19E on improved order inflow outlook. We have a Buy rating on the stock with a target price of Rs195.
Symphony is the largest air cooler manufacturer with a market share of ~50% in the organised market in India. Led by strong R&D, launched more than 40 new products in the last six years. Its asset light business model has enabled the company to sustain its EBITDA margin level above 20% and ROCE above 40% over the years.
Introduction of a new premium range of air coolers will prove to be margin accretive in the long run. We expect earnings to grow at 22% CAGR over FY17-19E led by volume growth. We have a Buy rating with target price of Rs. 1,418.
Diversified product portfolio, broad based customer profile and strong geographical presence establish MCIE a preferred choice for the OEMs. Scaling up new product line to drive growth in two wheeler business will paint positive outlook to the company.
We expect EBITDA margin to improve by 350bps over CY16-18E led by cost control initiatives and capitalizing the OEM mix. Consolidated Revenue/PAT to grow at 14%/57% CAGR over CY16-18E led by increase in order book from OEMs & recent acquisition (BFPL).
Q) Where are FIIs going? FPI net outflow from equities at Rs 7,344 crore so far in August. What is causing this change in the sentiment?
A) We believe that the performance of India will depend on the trend of Emerging Market and its position within the basket. On a long-term basis, India has shown a supreme performance with a return of 47 percent in the last 5 years compared to 9.6 percent by MSCI-EM and 30% by MSCI-Asia (ex-Japan) on a US Dollar basis.
On YTD basis too India has performed well with 25 percent return compared to 22 percent and 17.5 percent respectively. But, in the recent 1 to 3months, the inflows from FIIs have reduced which may impact the performance of Emerging Market, in which recently India is mildly underperforming.
On the valuation terms index is at a P/E of 18.3x on a one-year forward basis which is at a premium of 22% to the mean and 45% premium to the MSCI-Emerging Markets.
The recent increase in geopolitical risk, downgrade in earnings had impacted the FIIs inflows followed by Infosys issue.
Q) Were you satisfied with the June quarter results? If not, do you fear the recovery will take more time than market anticipate which is not a good sign for Mr. Market?
A) The double whammy impact of Demonetization and GST has been more than anticipated by the market. Analysts have sharply downgraded the forecast for FY18. This slowdown in earnings may continue over the next 1 to 2 quarters. And we don't think that it is completely factored in the market which will impact the performance in the short-term.
Q) What is your view on the banking sector especially PSUs as RBI chief calls for the recapitalisation of banks? Do you think it is the dark horse which nobody is looking at?
A) It is too early to judge the extent of benefit to the balance sheet & health of deprived PSU Bank from the proposed recapitalisation. Since it is still unclear about the real size of NPA carried by PSUB's and the quantum of write-offs they will have to undertake.
Further, there is no convincing improvement in the business growth outlook for PSU banks. PSU banks continue to be a laggard in the sector with muted credit growth losing significant market share in the last two years.
Recapitalisation alone will therefore not improve the health of PSU banks. The market is expecting more effective step like consolidation of the PSUB space to strengthen them and to make them competent, which will be a long-drawn process.
The current valuations seem cheap given apprehensions over non-forecastable issues, we have a cautious view on the PSU banking.
Q) Do you think the saga of shell companies is not likely to end anytime soon?
A) The intention of SEBI is to clean-up the market with an apprehension that transactions on penny stocks are also used to tamper Income Tax and Black Money. This decision is an extension of the never-ending measures issued by SEBI in a continuous manner to increase the compliance on penny stocks & P-Notes.
The implication of this decision will make the market more transparent which is healthy for retail investors. Whereas on the other hand, the implication could be nasty in the near-term due to a hit on the liquidity, and the confidence of traders especially towards small cap stocks with a fear of what more will be engulfed.
Having said that, the extent of the fall in liquidity will depend on how much of the money is stuck in the trading of those shell stocks or how active those counters were.
There are some discretionary views over SEBI decision on some stocks which have a fair amount of market-cap and business activities, which the respective companies will have to take up with SEBI separately.
At the same time, it is completely possible that this is not the end of the list of shell companies, in BSE there are more than 5,000 trading stocks of which many have negligible financial numbers but higher Mcaps.
Whatever is the case there will be no long-term impact on this measure since the liquidity which has been impacted was never a part of the market and will never impact the investment prospects of a genuine investor.
Q) Which sectors are likely to lead next leg of the rally in the next 12 months – is it digital India, e-banking etc.
A) As per our coverage, these are the sector on which we are positive...
The industry had been in a stage of high capacity additions during last one decade (increased from 157MT in FY06 to current ~421MT) which has come down subsequently due to subdued demand growth owing to slower progress in infrastructure projects, low off-take from the housing sector and excess capacities in various industrial sectors.
We forecast low addition in new capacity over the next 2 years at 25MT which coupled with a revival in demand on account of enhanced focus of GoI on housing and infra will lead cement demand & supply gap to narrow in the coming years.
Infrastructure - Positive
Currently, road sector is the bright spot in the infrastructure space. The government continued to focus on road infrastructure with an ambitious target to build 41km per day in FY18 has kept the sector on a sound wicket.
Additionally, increased capex of Rs1.31 lac crore for constructing new railway tracks, doubling, electrification, gauge conversion will give ample opportunities for railway EPC players.
Moving swiftly in the pursuit of affordable ‘Power for All’, the power sector is likely to witness major changes in a budgeted allocation to Rs106bn for integrated power Development and Deen Dayal Upadhyaya Gram Jyoti Yojana.
Till recently, major global chemical giants met their sourcing requirements from China due to lower cost and favorable currency. However, during recent times, there is a higher regulatory compliance requirement in China which has led MNCs to diversify their RM sourcing arrangement from China and adding India as an additional sourcing destination.
Govt. initiatives in the form of Port based Chemical Parks in SEZ, improvement in infrastructure, Tax concessions; rationalization of Duty Structure, FDI relaxation, etc. would facilitate further growth of Indian Chemical Industry into a major chemical hub.
There is a major push from the government to reduce the import dependence to 30% from current 60%-70%. In line with this objective, high priority is given to defence under “Make in India” initiative.As a result of this, we are witnessing a higher order flows towards domestic companies and improved traction in terms of government intent towards finalizing delayed large orders