We expect healthy 15-18 percent earnings growth and bullish on large-caps over the midcaps.
"We believe recovery track would be backed by better-than-expected corporate earnings FY18 and pro-BJP outcome in Karnataka elections which will shape up the second half performance of the markets," Prashanth Tapse, Associate VP, Mehta Group said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q) Market has been consolidating since Budget. What do you expect for the market from hereon?
A) Overall sentiments are positive but with weaker strength to sustain the levels due to some domestic economic saga as well as global news flow. As of now markets are correcting not on fundamentals but a combination of global market volatility lead by US trade war and locally PSU bank fraud nervousness causing the 1,000 points sell-off in last one month. As on date we feel investors have to look for some caution way and shift profits to frontline high quality stocks rather than holding midcaps. We anticipate that Global & Domestic economic growth will likely continue to lift earnings in 2018 but returns would be below sub 15 percent compared to last year party.
It’s very common understanding that whenever markets outperform and goes up very quickly in short period, supply comes with n number of reasons. Markets are irrational in the short term when long term growth is intact. 3 to 6 months volatility is accepted for a better recovery going forward. We expect another 3-4 percent (From Nifty 10,226) on the worst case scenario for markets to settle down near to bottom and consolidate for a better recovery. We believe recovery track would be backed by better-than-expected corporate earnings FY18 and pro BJP outcome in Karnataka elections which will shape up the second half performance of the markets.
Q) What could be the next key triggers for the market on the domestic as well as global front?
A) Domestically we expect healthy recovery in corporate earnings, Pro BJP State elections outcomes followed by Timely, well spread and sufficient monsoon would keep market on optimistic outlook while globally US Trade war saga, Oil prices and raise in FED interest rates scenario can break the markets sentiments on either side. Hence any unpredictable changes in these parameters will trigger market movements going ahead.
Q) At what Nifty levels do you think the current fundamentals of economy and corporate (earnings) are justified?
A) We were trading on premium valuations near 11000 levels pre budget 2018 wherein as of now markets have discounted majority of the downsides and are trading and historic avg valuations. As we said above currently markets are correcting not on fundamentals but with a combination of global market volatility lead by US trade war and weighing high on PSU bank fraud nervousness which was never anticipated by markets as a risk. We are still not able to digest the thickness of the bank frauds which is dampening the investment sentiments. Considering the worst case scenario another 3-4 percent (From Nifty 10226) would be level markets can test based on above assumption. We see big concern on the corporate capex plan after the PSU fraud chronicle, many corporate may reschedule there financial closure of expansion plans as bank will reduce taking larger exposure to big corporates. Considering all aspects we expect Nifty levels near 9800-9900 in the near term and on long term 11800 level would be the next achievable target for FY19.
Q) Now that Nifty has corrected 1,000 points from its record high, what should be the strategy in terms of allocation of funds (to equity, mutual funds, bonds etc), if a person has to invest Rs 10 lakh?
A) Considering the current scenario obviously we prefer to weight (50 percent) on Equity mainly on high quality frontline counters which are fundamentally strong, complying high corporate governance and has health earning visibility. We see many such quality companies have come at very reasonable prices for multiple reason. Accumulating those would be once chance which may not be available in next recovering bull markets.
We believe Mutual fund exposure as a second best to be investing mainly in the sector focused schemes like Pharma / Banks or diversified scheme with 25 percent weight which are best in the downturn scenario.
With respect to bond yields which are currently yielding better as the expected pickup in economic activity and demand for credit will also affect the cost of money in the economy. Therefore we see that the increase in bond yields is unlikely to be reversed significantly in the foreseeable future while the overall economic outlook is positive.
Q) Do you expect the US Federal Reserve to raise rates more than 3 times in 2018 and if yes, how do you see it impacting India's FII flows?
If Fed decides to raise interest rates sooner than expected, it will be less disastrous for India than the other emerging markets on long term basis while on short term India will be participating in outflow of money. Emerging countries with weaker economies will be severely hit. We expect softer oil prices and sufficient forex reserves to keep at bay for India in the event of a sell-off, we believe Fed tapering will also pulling down oil prices below current levels which will safeguard as better. No doubt, to that extent India is vulnerable and if there is a selloff in global equities or emerging markets, then we will not be spared. However, the decline may be less than other emerging markets. Nonetheless, there will be a negative effect. India cannot escape ‘risk off trade’.
To counter part Domestic institutional flows have been an important source of support for the market with CY17 seeing US$31.9 billion net inflows into MFs vs US$8.0 billion net buying by FII. With another $3 billion being pumped into equity mutual funds in February 2018, the domestic flows data for the month is reassuring the confidence in domestic story.
Q) PSU banks have been dragging down markets after the PNB fraud case. Do you expect further correction in the sector or is it a good time to buy?
The Bank fraud was unaccepted shockwave to markets and it has fundamental reasons to keep markets under pressure. Generally such mess comes out during bottoming cycle, which PSU banks are passing through. Worst seems to have been discounted in the PSU banks, but positive triggers are awaited when its wait and watch period. We expect elevated levels of provisioning NPAs will continue to have negative affect the banks during fiscals 2018 and 2019. The PSU banks have got their lessons. Most of the large losses are out and the prices at which the PSU banks are quoting makes them good investment thesis but not immediately. Considering the current markets situation we prefer to hold top private bank in the portfolio rather than accumulate the PSU space. We will revisit the PSU space once we see confidence.
Q) Which five sectors would you bet on keeping in view a possible earnings recovery from FY19 onward?
We expect healthy 15-18 percent earnings growth and bullish on large-caps over the midcaps.
Below are the Top five sectors we are optimistic in coming 2-3 years.1. Capital Goods
4. Financial Services
5. Real Estate
Q) what are your top five wealth-creating ideas for investors with a time-frame of 2-3 years?
KEC International | Rating - Accumulate | CMP - Rs 393 | Target - Rs 500 | Return – 27%
KEC International (KEC), the flagship company of the RPG group, is a leading EPC player in T&D Space. KEC has over 7 decades of experience with footprint presence in 63 countries and strong execution capabilities across all the segments. We expect T&D business regains momentum by expanding beyond boundaries and Strong order inflows improving revenue visibility. Energy & Rail– Priorities of the New Government sector in focus: The Govt proposed 100 percent rural electrification by 1st May 2018 which act optimistic for the company’s T&D business and also proposed 3500km of railway lines to be commissioned in FY18 which is good for KEC as it is focusing more on Railway business.
Maruti Suzuki | Rating - Accumulate | CMP - Rs 8,715 | Target - Rs 11,330 | Return – 30%
Maruti has historically built strong brands and that has resulted to maintain the lion's share of small car and support healthy volume growth. New launch like New Swift Brezza, Baleno and IGNIS have performed better than market expectations. Eyes toward electric vehicles: Company plans to introduce EVs as soon as market sets to swift from traditional vehicles to EV segments. It is focusing on hybrid technology, which is a step toward electric mobility. Li-ion battery plant, which is being set-up by JV between Suzuki, Toshiba and Denso, would help to reduce cost of hybrids and EVs. MSIL has plans to expand its Nexa network for the premium segment to 400 outlets by 2020 from 200 currently. We are positive on the space on long term
Bajaj Finance | Rating - Accumulate | CMP - Rs 1,669 | Target - Rs 2,170 | Return – 30%
Bajaj Finance (BFL) has continued to maintain its strong growth momentum with a 35 percent yoy growth in consolidated AUM at INR 779 bn, largley led by consumer and commercial financing. Asset quality during the years was steady. Despite providing in excess of RBI requirements, the company has managed its credit costs well. Segment wise, the company continues to be cautious on SME financing as it continues to witness some pressures in the self-employed mortgages (LAP & SEHL). At currently level asset quality is one the best in the industry along with a comfortable coverage ratio, despite maintaining a growth rate more than 30 percent. We continue to be positive in this space for 2-3 years for healthy returns.
HDFC Life | Rating - Accumulate | CMP - Rs 430 | Target - Rs 560 | Return – 30%
We believe HDFC Life has Unique Positioning in Life Insurance Space with strong parentage and a trusted brand that enhances its appeal to consumers. Consistent revenue growth: Between FY15 and FY17, annualised premium equivalent posted a CAGR of 14.5 percent. The company has a healthy balance sheet with total net worth of Rs44.6bn and solvency ratio of 200.5 percent as of 30 September 2017, above the minimum 150 percent solvency ratio required under the Insurance and Regulatory Development Authority of India or IRDA regulations.
Godrej properties | Rating - Accumulate | CMP - Rs 738 | Target - Rs 950 | Return – 29%Godrej name is next to quality in this industry. It has different land bank strategy like JV with land owners that reduces its land cost and also ties up with developers as a Development manager which helps it earn 10-11 percent of revenue for branding, marketing and selling of the project. We believe new project pipeline continued to scale up in operation. Godrej have completed the RERA registration of all their projects in Maharashtra, Karnataka, Chennai, Ahmedabad and NCR. Post implementation of RERA, opportunities for new project acquisitions are expected to increase, especially for organised developers. The combination of GST, the Real Estate Regulatory Act, an improving economic environment, lower inflation, and lower interest rates has led to much better affordability and are expected to revive housing demand.