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Last Updated : Oct 01, 2019 12:21 PM IST | Source:

'Don't expect a V-shaped recovery in economy, market; further re-rating difficult'

FIIs are concerned about global slowdown due to US-China trade war, Brexit, geo-political issues and premium valuation in developed countries like the US, says Vinod Nair of Geojit Financial Services.

Sunil Shankar Matkar
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Todays L/H

The broader market should maintain a positive bias in the long-term, and 11,100 to 11,300 was likely to be a strong support for the Nifty in the short-term. However, a V-shaped recovery was unlikely, though the worst for the domestic economy would be over by the second or the third quarter, Vinod Nair, Head of Research at Geojit Financial Services, said in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpts:

Q: Do you think that an increase in fiscal deficit following the government’s measures to revive the economy will ruffle the market?


A: Post the sharp cut in the corporate tax to boost investment in the private sector, the market is considering a dilution in fiscal deficit from 3.3 percent (target) to 4 percent due to loss of Rs 1.45 lakh crore in corporate tax. India’s 10-year bond yield has inched by about 50bps in the last two-and-a-half months, anticipating a higher government borrowing in the future. No clear direction regarding managing this situation from the government is hurting the sentiment of the bond market.

This may impact equity market, too, which has rallied recently due to sudden hike in earnings without any extra economic efforts. The broad economy will take some time to benefit and the government is considering divestment as an important resource to reduce the deficit gap.

Q: Do you feel this is the right time to buy midcaps and smallcaps, especially after the tax rate cut?

A: The measure may not be of extra benefit to mid and smallcaps, while it is for stocks in the highest tax bracket. Generally, we also feel that largecaps will have higher benefit since they have the ability to come up with new investment plans and are immediate beneficiaries of improved economic activities.

Regarding mid and smallcaps, given a deep correction in the last one and a half years due to a slowdown in domestic and global economy, disruption in system liquidity, structural, cyclical and policy changes, the valuation and prices have bended below the long-term trend. NSE Midcap100 and NSE Smallcap100 indices are down by 27 percent and 41 percent, respectively. According to Bloomberg, the one year forward P/E of Midcap is at 14.5x, which is about 20 percent below the 5-year average while the all-time high was 26x.

Q: What is your advice to the investors who missed the massive rally?

A: The equity market may trade with a mild negative bias in the short-term due to a sudden push in prices. But, we expect the broad market to maintain its positive bias in the long-term, and 11,100 to 11,300 is likely to be a strong support for Nifty50 in the short-term. However, we don’t expect a V shape recovery in the economy and market. Having said that, the worst for domestic economy will be over by Q2–Q3FY20.

Q: Do you expect a solid re-rating in EPS and PE multiples of the market after the cut in corporate tax rates?

A: We had a conservative view on the market and had cut the target of Nifty50 to 11,600 after weak Q1FY20 results and economic data. Post this measure, we have turned positive. We increases the EPS growth for FY20 from 10 percent to 18 percent and maintain 15 percent for FY21 & FY22. This leads to an EPS of Rs 580, Rs 668 and Rs 768 for FY20, FY21 & FY22 respectively.

We value the Nifty as one-year-forward P/E of 17.5x on one-year-forward EPS of Rs 716 to arrive at the target of 12,500.

Q: What more do you expect from the government to revive the growth, sentiment at the FII desk and re-rating of the equity market?

A: The government has been working well to overcome the economic clampdown. To see a faster recovery, we need to bring normality in the financial system of the country. A quicker remedy is needed for IL&FS, housing finance and smooth working of the GST system.

FIIs are concerned about global slowdown due to trade war, Brexit, geo-political issues and premium valuation in developed countries like the US.

Regarding re-rating in India, the market is already trading at premium valuation, further re-rating is difficult in the short-term, as growth in prices will be more from earnings growth in the future.

Q: Can you name midcaps and smallcaps that are more attractive now and will benefit the most from the improved liquidity, cut in the interest rates, tax rebates and transmission of credit flow?

From the mid and smallcaps under our coverage, these six stocks are likely to have the maximum benefit; namely, PVRManappuram FinanceMold-Tek PackagingKEC International and Avenue Supermarts.

Q: As many of the consumer focussed companies expect double-digit earnings growth and a good festive demand, do you think the worst is over or you will wait for a couple of quarters before taking a call?

A: To have a V-shaped recovery, the world export market has to improve, which is not visible today, while we also have to remove the blockages in our financial system. So, we expect gradual improvement in our economy in which consumption will see an immediate benefit led by stability in job market, festive season and a reduction in interest cost. A quick benefit will not be replicated in non-consumer sector as financial sector and investments may have a lag effect.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.


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First Published on Oct 1, 2019 12:21 pm
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