Akash Jain of Ajcon Global said with GDP going beyond 8 percent, the pressure on rupee should come down
Nifty may not touch 11,800–12,000 levels in the immediate future as the largecaps forming the benchmark indices are overheated, Akash Jain, Vice President - Equity Research, Ajcon Global, told Moneycontrol's Sunil Shankar Matkar.
He added that market may come under pressure due to sliding rupee and burgeoning fiscal deficit. Hence, recommends keeping a cautious approach. Edited excerpt:
Do you see the Nifty heading towards 11,800-12,000 levels or is the market overvalued at present?
We do not see Nifty heading towards 11,800–12,000 levels in the immediate future. Yes, we do believe that largecaps forming the indices are overheated although there are many midcaps and smallcaps available at reasonable valuations after a significant correction post-LTCG imposition in Union Budget 2018-19, implementation on ASM and the recent SEBI circular on FPIs which dented sentiments of street participants as a whole.
What factors are actually driving the market higher? Any risks going forward that one should keep in mind?
There has been a strong inflow of domestic money coming through mutual funds and also from overseas investors. We believe at current levels, there is definitely some element of risk in the short term.
Despite GDP showing good strength, the perils like rupee trading at record low against the dollar and high crude prices can have a huge bearing on the Fiscal Deficit which can eventually dent market sentiments.
We believe markets may come under pressure due to sliding rupee and burgeoning fiscal deficit. We recommend a cautious approach. Going ahead, we believe, the progress of ongoing monsoons, rupee movement against the dollar, volatility in oil prices, trade war tensions, US Fed meeting on rate hike will keep domestic bourses volatile.
We believe that the investors can have a stock specific approach.
With regards to rupee hitting a record low against the dollar we believe IT, pharma, textile and speciality chemicals will be beneficial. The rupee fall will be favourable for ONGC and Oil India as they sell crude to oil marketing companies in dollar terms.
On the other hand, oil marketing companies like HPCL, BPCL and IOC will be impacted in margin terms as they buy crude oil in dollar terms.
Import dependent companies will be badly hit due to continuous slide of rupee.
Even some of metals, power and cement companies which are dependent on coal import will also be impacted. Importers will be badly hit due to this currency war. Companies which have high external commercial borrowings will, too, get impacted, which include telecom sector as well.
The Indian economy has been growing over 7 percent. Is it sustainable and do you expect GDP growth to hit the 8 percent mark soon?
The Indian economy grew 8.2 percent in April-June this year, the highest in two years, amid signs that households are buying more and companies are adding capacities, shrugging off the disorderly effects of the twin shocks of demonetisation and the goods and services tax (GST).
The monsoon rains, critical for the summer-sown kharif crop, has been slightly below normal this year so far, particularly in the grain bowl states in north India, but the shortfall isn't alarming enough to pull down growth in the broader economy.
The present GDP calculations are on a revised base year which amounts to approximately 1.5 percent to 2 percent higher than the GDP arrived earlier before 2011-12. Hence GDP going to 8 percent is not a surprise to us.
The dollar-rupee is close to record lows while crude oil prices have started to inch up again. Where do you see the same?
The rupee slumped and breached 71.5 level against the dollar for the first time ever on persistent demand for the US currency amid rising crude prices. We believe the Rupee could have been better managed by the regulators as the foreign exchange reserves position is comfortable.
With GDP going beyond 8 percent, the pressure on rupee should come down. We do not see rupee going down below Rs 73 soon.
Do you expect more populist measures like farm loan waivers ahead of state and general elections?
Yes, this is the biggest worry as this can increase agriculture NPAs in the PSU banking space. The challenge for the Government remains to balance growth while announcing populist measures.
Banking and financials have rallied the most in the last couple of months and has been the key market driver? Do you feel all negatives are priced in and is poised for growth going forward?
Yes, most of the negatives for PSU banks have been factored in. With the GDP going up, the credit offtake will increase, which will reduce the NPA levels in percentage terms.
We heard from most managements is that they have accounted for all the stress in NPAs and have provided for it adequately.
Most PSB chiefs are focussing on recovery. If a recovery kicks in, then we would see a strong write-back in coming quarters in most PSBs.
Having said that, we, however, do not rule out further slippages and write offs in PSBs as we are still unsure if there is more pain left in the books. Recapitalisation and recovery measures would improve the bleak picture in the PSU banking space.
However, PSBs should perform on their own rather than depend on recapitalisation. The depressed valuations can be a good entry point for investors with a long waiting period and high risk appetite.
The Nifty Pharma and IT indices have been on a tear of late. Do you expect the run to continue in both sectors?
Indian pharma companies were hammered by the USFDA due to strong lobbying by US companies and US President Donald Trump's pharma policies. The USFDA seems to have softened its stand on Indian pharma companies off late. Pharma and IT are the best Buy sectors presently considering the rupee depreciation scenario and digital offtake in IT companies.
FMCG stocks have returned over 27 percent in the last one year. Do you think the sector is overvalued and have you changed your FY19-20 earnings expectations?
Yes, the sector is overvalued. However with good progress of monsoons, sowing would get a boost which would have positive impact on earnings of companies focusing on the farm sector. However, we may expect a some correction in this sector.
What are your top 3 bets for next 1 year?
We believe Sun Pharma is the best play in pharma space and investors can add this stock to their long-term portfolio. The company reported stellar Q1FY19 results and were above our expectations.
At CMP, of Rs. 655 stock trades at a P/E of 43x at trailing 12 months which seems expensive in the near term after the recent rally.
However, considering the long term prospects of the company and expected approvals of its products pipeline after the USFDA's clearance of its Halol plant (after nearly 3 years of non-compliance), we believe investors will be rewarded in the longer term.
In addition, we believe improvement in Taro’s US business (declined in Q1FY19) in the coming quarters along with a ramp-up in India and non US markets such Europe (Q1FY19 growth of 22 percent in India coupled with 11 percent growth in ROW driven by key markets including Romania, Eastern Europe, and Asia) will help to sustain margins.
We believe Mahindra & Mahindra Financial Services is cheap as compared to other listed NBFCs. The company improved its Return on Assets significantly from 1 percent in FY17 to 1.9 percent in FY18. With improving rural cash flows, recovery from NPAs would help the company to improve its ROA of 2.6-2.8 percent by FY20.
The management is optimistic on improving rural cash flow which should lead to growth of 18-20 percent in FY19 across segments.
NPAs in the rural housing is expected to reduce in coming quarters as Maharashtra has improved in cash flow and which will translate towards recoveries. PCR stood at 58.1 percent in FY18. We expect a target of Rs 544 by FY19 end (P/BV of 3.2x on estimated FY19E Book Value of Rs. 170) implying an upside of 22 percent.
We believe life insurance segment is underpenetrated, rising share of insurance in financial savings and given the big opportunity present in this sector, we recommend investors to have a slice of it in their portfolio. India continues to be under penetrated as compared to countries like Thailand and Korea.
At CMP of Rs. 664, the company is valued at 3x of Market Cap/Embedded Value. The company boasts of a strong distribution network owing to its parent SBI reach in the country and low cost to income ratio as compared to peers. We recommend a 'Buy' with a target price of Rs 800 by FY19 end implying an upside of 20 percent.Disclaimer: The author is Vice President - Equity Research, Ajcon Global. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.