Earnings hold key to positive market outlook; like auto, infra and consumption names: Arihant Capital

The market is certainly not showing signs of great returns as it did in 2017. What is your outlook for the the rest of the calendar year? The outlook is positive based on macro-economic factors. In February, non food credit growth was at 11.6 per cent, CP issuance was up by 22 percent, representing rise in working capital demand by corporates. The IIP stood at 7.5 per cent, reflecting strong industrial recovery, capital goods production stood in double digits, while auto sales growth was robust at 22 per cent year on year in February. Major port traffic grew by 9.1 per cent year on year, CPI was at 4.4 & WPI at 2.5 moderated due to vegetable & food prices.

However, core inflation remained sticky at 5.2%. Barring rising oil prices, all other macro factors are very attractive at the moment to attract fresh investments. For rest of the calendar year, the outlook will be based on actual earnings. If we see a recovery coming back in earnings, our positive outlook on the markets will continue.

Is there likeliness for more correction or is it going to be a consolidation mode from now on? As we speak, we have already started seeing recovery in the markets. In the near term, markets are showing signs of bottoming out.

Are there any levels on the Sensex & Nifty for CY2018 and FY2018? Out technical levels for Nifty on the higher side are 10,460, 11,000 & 12,300. On the lower side the value of the lower trend line of the upward channel is in the range of 9600-9450.

How are midcaps placed? Stellar returns of 50 percent may not be probable this year. But how should investors play this space? Mid-caps have undergone decent correction. Companies justifying valuations with good earnings recovery & sustainability will be able to give 25-30% returns from current levels. However, this will differ from stock to stock.

Are there greenshots in the earnings space? What are your growth estimates for FY18 and EPS estimates too? While effects of demonetisation & GST are expected to come down and earnings recovery is expected from forthcoming result season, we expect at least 12/15% recovery in earnings for FY18 except for banking sector.

Despite relatively better earnings and macros, are high valuations seen as the reasons for the consolidation move in the market? It is largely true. Indian markets traded above average valuations for 3 to 4 months due to strong liquidity & feel good factor. However, with LTCG in Budget, PNB fraud case & Trump imposing trade tariffs the sentiment vanished leading to fast profit-taking. This has given some room for valuation adjustment, bringing market again to level playing field for fresh investments.

How big is the trade war fear, which spooked the market last week, in the scheme of things? What is the weightage of political stability issues? The fear of trade war can be very large as it imposes big obstacle in the international trade. It is very difficult to measure the exact impact. However, it leads to lot of uncertainties in the future of international businesses which took good shape in last decade. Political stability again has a very big weightage.

Stable government in India as well as the international scenario helps in estimating growth for future. Any instability and sudden policy changes leads to uncertainty and therefore poses difficulty in projections and estimations.

Your take on crude and rupee… Crude has already risen very slowly and steadily from its bottom level & is trading at new high in last few months. As per few experts above USD 70 per barrel, shale Gas supplies will bring down the prices. Rupee is expected to stabilize at the current levels. However, if going forward we see higher Trade deficits, we may see rupee weakening further.

IT space has seen a good comeback this year. Do you expect the performance to continue? What about metals, consumer and rural-theme stocks? In the IT space, stocks were available at reasonable valuations. Majority of the players improved upon their digital side of businesses. Many small players were already active on SMAC side of business. There is good amount of visibility in their businesses. Also, with the pickup in the overall global growth, valuations of these Companies look comfortable. Metal stocks have done well so far. Earnings of these Companies are also likely to show good improvement.

With new acquisitions happening through NCLT, the scale & size of existing businesses can be expanded. Outlook for Consumer & Rural focused stocks also remains positive with robust demand & Govt’s plan to double farmer’s income by 2022.

What sectors may be in focus for FY19? Any stocks that you are betting on and the rationale for the same? With decent correction in recent past & improvement in Macro parameters we remain positive on the Broader markets going forward. Auto sales continue to be robust till Feb’18 making sector still attractive, albeit selectively. Within the segment we expect M&M & Tata Motors to do well in FY 19. Good growth in auto sales makes Auto ancillaries also focus area. We like Wabco & Jamna Auto in that space.

Considering that lot of Infrastructure work has still to be completed, infra sector as well as Capital Goods sector still looks good. We like NCC , KNR construction, Sadbhav Engineering.

Consumer & Rural Focused Companies are also still attractive as demand is expected to be robust. PSU banks are undergoing a very tough phase as of now. However, they may look interesting after a lag of one quarter. In that space we like Bank of Baroda.