Given the business opportunity offered by financial inclusion, we feel financial sector has the potential to produce multi-baggers over maybe next decade or two, Arun Thukral, MD and CEO of Axis Securities said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) It looks like markets have climbed the wall of worries and suddenly things are back to normal. Both small and midcap stocks have hit fresh record highs. Do you think this trend is sustainable and we are on track to hit fresh record highs possibly in Sept or Oct?
A) The markets are taking every day with a fresh start; they are driven by the steps undertaken by the government to formalize the economy by the way of demonetisation and GST.
These reforms, being structural in nature, are going to transform the economy and accelerate the pace of growth in near future. Though the earnings look elusive in the near-term given the impact of back to back reforms viz., demonetisation and implementation of GST, they are likely to come back with larger force once the effect of GST is materialised.
The markets are hence consolidating at these levels. Though scaling fresh highs looks unlikely in the short-term, the down side is also limited cushioned by the liquidity from MFs; recently, the MF industry AUM is now at an all-time high.
Domestic retail investors are investing in equity markets using MF route. However, the wall of worry still remains, be it geopolitical tensions, possible liquidity erosion due to US balance sheet trimming or the concerns about domestic earnings growth.
Q) Top five stocks/sectors you think could produce multi-baggers in next 2-3 years?
A) Multi-baggers evolve over a period of time and real returns come out after 4-5 years. Given the business opportunity offered by financial inclusion, we feel financial sector has the potential to produce multi-baggers over maybe next decade or two.
Similarly, the disruption caused by the non-renewable energy sector and electric vehicles also has potential to produce multi-baggers.
Q) Analysts, as well as research firms, have already started lowering their estimates for GDP growth. Will it bring down the investment argument in India which was considered the fastest growing economies in the world?
A) India is in sweet spot benefitting from the demographic dividends, rising savings rate and contained macro-economic variables along with the structural reforms implemented in recent past.
Over the short term, there is likelihood of downward revision of earnings and GDP growth, but both these numbers are likely to bounce back as the positive effect of implementation of GST and good monsoon trickle in.
The way structural reforms are being implemented, the economy is expected to grow healthier and accelerate on the path of growth. Demonetization has brought about financialisation of the economy while GST will bring about formalization.
The economy is far behind the developed nations in terms of consumption metrics, infrastructure, export potential etc. Hence, the Indian economy has a long way to go and thus India as investment destination persists.
Q) The market-cap to GDP ratio is trading at its long term average, but valuations of Indian equities remain rich. The Sensex trades at a 12-month forward P/E of 19.2x, at an 11% premium to a long-period average of 17.4x. Sensex P/B of 2.8x is at 4% premium to its historical average. How should investors read through this information?
A) No doubt the markets have run up sharply over the last 7-8 months, but we are still far from the euphoric levels that markets had visited in January 2008.
The investment parameters optically look to be stretched as the salutary effect of the reforms undertaken over last year are yet to materialize.
The returns in the Equity market are lumpy in nature; there is the likelihood that the markets would consolidate at these levels before taking a fresh stride ahead.
As it is practically impossible to catch the tops and the bottoms of the market, the investors should keep on investing directly in equities at different price points or practice SIP in stocks and equity MFs to get the benefit of value averaging but stay put invested.
Q) Gold has caught fancy of investors in 2017 amid rising geopolitical concerns. What are your views? Should investors start allocating some amount of their portfolio towards these safe havens?
A) Gold is a hedge against uncertainties. The geopolitical tensions in Korean peninsula have caused the shift towards gold as an investment haven.
If tension flares up in the Korean peninsula, there is the likelihood of sharp up move in Gold. But if it doesn’t, gold will retreat. Gold offers no other return other than hedge in uncertain times.
In contrast, equities are to be invested for eternity. These are backed by solid, remunerative businesses. As long as economy and businesses are growing, equities will offer better nominal returns.
Hence, one may look at Gold for investment in the short term to cash-in on the volatilities in uncertain times but should stay put invested in Equities and add on declines.
Q) What is your call on small and midcap stocks which saw double digit cuts in the month of August? Earnings have failed to surprise on the upside but the rally continues. Do you think we are seeing a bubble formation in this space?
A) We are still far from the frothy valuations in any of the segments. The correction in mid and small caps was due to failure to meet the quarterly performance expectations. Given the sharp run-up, one should selectively invest into mid and small caps after proper due-diligence.
Q) Why are FPIs fleeing India? They have already taken close to USD 2 billion from India equity markets in the month of August. Is it temporary or will the trend continue?
A) Uncertainty due to geopolitical tensions in Korean peninsula has been the prime reason for FII’s selling in Indian markets.
In addition, the relatively tepid Q1FY18 results also helped the cause. Q1FY18 corporate earnings performance was on expected lines and Q2 is also expected to be tepid.
Hence, as the tension in Korean peninsula diffuses, we expect the FII’s to return to Indian markets.
Q) What is your call on NBFCs which have caught investors’ attention in the past few months? What is driving the rally and is it sustainable?
A) The financial inclusion affected by the JAM trinity and the financialisation of assets due to demonetization opens up a big opportunity for the NBFC segment which caters to the bottom of the pyramid as the latter finds it difficult to deal with banks due to stricter norms.
Moreover, the reforms undertaken to deepen the bond market enables the NBFCs to raise funds at cheaper rates, thereby keeping the cost of funds in check.
Thus a big opportunity coupled with the availability of cheap sources of funds make NBFCs an attractive investment avenue. As the NBFC segment has got investor fancy, one should look at investing from long term investment horizon or add on declines.
Q) MF AUM hit historic Rs. 20 lakh cr mark in August which talks about retail investors’ participation which only doubled in the last three years. What is the way forward?
A) The demonetization has effectively caused a shift in the asset allocation from physical assets to financial assets. In addition, the reforms undertaken by the regulator and the Govt. have made equities a safe investment avenue notwithstanding its volatility.
Moreover, the participation from tier 3 and 4 cities in highly encouraging and there is a clear shift towards equities versus debt. Going forward, the inflows are likely to rise given the relatively unattractive returns offered by other asset classes viz., FDs, Gold and Real Estate.
Q) How should one choose stocks for investing in this market for the long term? Apart from technical factors what are the fundamental factors which one can consider to spot a multi-bagger bet?
A) Investing in equities involve partnership in a business. Hence, the first and foremost factor to be considered would be the management quality- the vision, understanding, and commitment that the management brings to the table.
The wealth creator idea is a business which has great growth opportunity and the sustainable moat that decides the pricing power and business entity’s ability to remain entrenched despite competition.
The multi-baggers are created if such opportunity is identified in its infancy and at pretty cheap valuations. Lastly, having identified such an opportunity and invested at fairly decent valuations, one must have to have the patience to keep invested over long period despite market volatilities.