For wealth creation opportunities, look outside Nifty: Motilal

Rajat Rajgarhia, MD - Institutional Equities, Motilal Oswal Securities is of the view that the market is throwing up many new wealth creating opportunities for investors for the next four-five years – spaces like insurance, consumer discretionary and within that branded apparels, rating agencies, smaller beverage companies etc. "One should look at spaces that are outside the Nifty 50, where there are many interesting stories coming up," he told CNBC-TV18 in an interview.

He is also very bullish on the microfinance and midcap pharma space. He advices avoiding the telecom space and revisiting the space around February-March next year for better visibility.

The current volatility and correction in the market is providing an opportunity to buy the stocks investors liked, he said, but added that the correction is unlikely to last long. "Therefore, at every level of correction, one can look at buying stocks." According to Rajgarhia, we are the beginning of a quarter where there will be earnings growth and see start of double-digit growth. So, pick up spaces with growth visibility.

When asked about what the foreign institutional investors’ interest into India was, Rajgarhia says a lot of new hedge funds are showing interest in India. "However, the long only funds have shown low activity."Below is the verbatim transcript of Rajat Rajgarhia’s interview to Anuj Singhal and Latha Venkatesh on CNBC-TV18.Anuj: This correction was pending, a lot of people would say that. The excuse has come in terms of that border skirmish. But how low in this correction do you see the market going now?A: Whenever you have events which drive corrections, you first need to take a view on the event and we are just one day into this event. It is a week but the event that let the markets down is just a one day hold. So, in the short term at least the trading community is going to be a little cautious, would wait for things to stabilise.Investors who have been waiting for the period should start slowly coming back, markets down almost 400 points from the high. Many of the stocks that one would have wanted to buy are more than 10 percent down. I don't see this correction lasting longer because the rest of everything relating to India looks pretty good. So, can't time the event but as prices start getting attractive, start chipping in.Latha: But are they attractive at 8,600 or considering that there are some dark clouds over global markets as well you would rather wait for lower levels, how much lower can it get?A: At every level of the market, there are many stocks that you can keep buying but important to know -- in the context -- is that you are at the beginning of a quarter where you will start seeing a double digit growth returning back into the corporate earnings and if you look at the interest rates, ultimately markets are a function of earnings growth and rates and both are in favour right now. So, 8500 levels is one way to look at it but many of the stocks where the growth outlook is good, whatever corrections you get in them, they only make the prices cheaper.Global markets -- throughout the year we keep on hearing both ups and downs but please note that US markets are just within 2-3 percent of their lifetime highs. So, they are not nervous as what the context right now makes it look like.Anuj: At Motilal Oswal the big wealth creators for you have been the discretionary consumption stocks the auto stocks the likes of Maruti Suzuki, Eicher Motors, Hero MotoCorp will you buy them, will you top up on them at lower levels?A: Yes, because there is nothing in the last one week that has happened, which has made us change even one percent growth outlook for these companies. The only thing that has changed is that may be some of these stocks have become 5-10 percent cheaper, nothing else has happened. So, whichever stocks we used to like a week back today we are just getting them cheaper. So, that is something which works in our favour today.Latha: But I notice that your research report says that you have trimmed your FY18 earnings per share (EPS) a bit. Can you tell us what is your FY17 EPS for the Sensex and what is your FY18 EPS?A: Our FY17 EPS growth for Sensex would just be into a high single digits but if you just break that into first half and second half -- first half you would have seen an earnings growth of almost being flat and second half is when you will see an earnings growth of double digit. That will well continue into FY18 also. So, in FY18 we are looking at about 14-15 percent growth. FY17 we are looking at a high single digit growth._PAGEBREAK_Anuj: Since you talk to a lot of Foreign Institutional Investors (FII) as well what is the mood on India right now and do you expect fund flows. We have seen a bit of a slowdown in FII fund flows over the last two weeks. It is clearly visible. We have seen Rs 500 -600 crore daily before that and the market was rising accordingly. We have seen a bit of a slowdown. What has been the feedback from the investors?A: That is an interesting question because there is no definitive trend that you have seen in the FII flows right now but if I categorise the FIIs into two categories long only and hedge funds, we have seen very low activities from long onlys on the flow side.But as far as the hedge funds are concerned, there are significant number of hedge funds, which have come up in the last one year and their allocation to India has been rising. So, we have seen reasonably good activity coming from hedge funds and very low activity happening from long only guys. But also one point that you should note that there are a lot of initial public offerings (IPOs), a lot of sales that happens from corporates to investors, lot of sales that is happening from private equity guys to investors. So, the total flow that you see into the market is a combination of trades happening from primary to secondary or from foreign direct investment (FDI) and FII. Net-net, if we adjust for all of these the FII flows in India has been very moderate.Latha: Other than consumer durables what would you buy at these levels, have non-banking financial companies (NBFCs) become already attractive for you. Are you dipping your toes at all in public sector undertaking (PSU) banks?A: Consumer discretionary we just keep on expanding the definition of consumption now. What started from staples, moved to autos, moved to media, moved to apparels, moved to air conditions and this space will keep on growing. We are always a buyer into more and more stocks into this space.Secondly as far as the NBFCs are concerned I am not in the camp, which is going to chase stocks, which are at 5-7 times price to book but yes, at all points of time you can still find NBFCs, which are at 2 times price to book, stocks like LIC Housing are still at two times price to book. Muthoot Finance is still at two times price to book. PSU banks -- the worst is definitely behind for them but more importantly while structurally they would still be into a losing market share battle, you will see cyclically things getting better for them from the next 12 months point of view.Anuj: Any pharma stock that you would want to buy at current levels?A: Within pharma, the whole attraction at all points of time keeps on revolving around the midcaps because in our earlier interactions also I have discussed that pharma is a classic story in India where you keep on betting on the midcaps where they have a strong pipeline where they can keep on growing at 25-30 percent for a period of 4-5 years and valuations always skyrocket from 15 times to a 25 times earnings. So, while the big ones like Sun Pharma, Lupin have kind of become more of a portfolio stocks, the cream in the sector always lies into the midcaps. That is where essentially we need to focus upon to make money.Latha: I wanted to ask you about insurance. ICICI Prudential is suddenly 10 percent cheaper, that sector and any stocks?A: We don't have a formal coverage on insurance right now. So, I won't talk on the stock but recently we had opportunity to interact with most of the insurance players and investors. As a space is this going to be a wealth creator for the next 5-10 years? Answer is a big yes. Are investors waiting for the valuation in this space to get better? Answer is yes. Because most of the investors are looking to make their allocation to the insurance space and fortunately now this year you are seeing the market offering the listing opportunities also to two big names, which is ICICI Prudential and HDFC Life. So, investors will look to buy into these stocks but right now everyone is just figuring out what should be the right valuation or the right price for these names.Anuj: What should be the right valuation or right price for telecom stocks now? We have seen so much wealth destruction in names like Idea Cellular, even Bharti Airtel hasn't done much. Reliance Communications of course is a completely different case altogether but how would you approach these stocks?A: The best way to approach them is to avoid them right now because don't just get into buying them because the absolute price level has fallen. More importantly, you are going to see a massive shift in the way the revenue profile of this industry has behaved. That is going to decide whether there is going to be a winner and if yes, then who is going to be that winner. In another six months, by the time you reach into February and March, you should have some visibility of what FY18 should pan out. That would be the time when one should dip into telecom space.Latha: Which are the sectors that we have not discussed and you find attractive? For instance, tyre has been running up. Micro Finance Institutions (MFI) among the financial space and I distinguish that from the NBFC the likes of Ujjivan, the Equitas, the Bharat Financial. There are all these outlier spaces that are moving up, any suggestions?A: You are talking about the right space that investor should be looking at which is the outlier away from the mainstream ones. So, MFIs you can call it outlier but that has been hogging a lot of limelight. Every company you meet, they guide about the next five year growth of 25-30 percent. You look at consumer discretionary, I keep on coming back to that, but that space is expanding rapidly. If you look at branded apparels next 5-10 years is going to be a massive opportunity in this country. You look at smaller or the midcap companies, which are into either beverages, which are into eateries, which are either into media, every company, which is going to benefit from this next five-year consumption boom, they may be small today but the compounding will make sure that many of them will be very attractive.Autos, when we are looking at the entire autos as a volume growth story, many of the component names are going to see both better volumes and margins for them. So, there are enough number of stories that one can be positive on but they are outside the Nifty 50. So, one will have to just broaden the horizon of picking which are going to be the winner.Lastly, this year is very important because this year is throwing up a lot of new opportunities for investors to make allocations. You had insurance, hopefully in the next 12 months we should have exchanges, then rating agencies which currently we don't cover but looks exciting. So, many new spaces are opening up for investors to benefit over the next 4-5 years from investing point of view.