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Last Updated : Sep 07, 2018 08:13 AM IST | Source:

FY19 target for Nifty at 12,620, but higher crude prices & weak rupee combo is the key risk

Shailendra Kumar of Narnolia Financial Advisors said rising domestic fund flows into equity, economy getting more organised, efficiency gains and strong consumption are various factors adding to buoyancy on domestic bourses.

Sunil Shankar Matkar
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Based on FY19 and FY20 EPS estimate, the target for Nifty for March 2019 is 12,620, Shailendra Kumar, Director & CIO, Narnolia Financial Advisors said in an interview to Moneycontrol's Sunil Shankar Matkar.

In terms of risks for the market, he pointed out that the key concern is the rise in crude price accompanied by the fall in rupee. Beyond a threshold, this combination is going to push current account deficit to a point where it becomes highly inflationary for the economy and can disturb the fiscal balance.

Edited excerpt:


Do you see the Nifty heading towards 11,800-12,000 or is the market overvalued at present?

Year-to-date Nifty has been the best performing index in the emerging market basket. If we look at the recent past of the current bull market, Nifty makes a cyclical high once it starts trading at 24 times trailing 12 quarter earnings and it makes a bottom around 18 times one year forward earning.

So, using the current consensus estimate, the immediate trading range for Nifty is 10,980-12,089. Here, it is important to know that every quarter this range needs to be adjusted mostly upward, based on reported earnings.

Presently, based on FY19 and FY20 EPS estimate, the target for Nifty for March 2019 is 12,620.

Can we call these valuations multiple overvalued depends on, whether fundamental parameters like net profit margin and asset turnover ratio are going to dip or rise from here on? And these parameters have just started inching up from multi-year lows so we can very well see Nifty trading within these valuation ranges for few more years.

A bull market ends only when valuation and fundamental parameters like NPM are all at a multi-year high. At the same time, we may witness some changes in the range due to liquidity impacting events like elections even in a structural bull market.

What factors are actually driving the market higher? Any risks going forward that one should keep in mind?

Rising domestic fund flows to equity, economy getting more organised, efficiency gains and strong consumption are various factors adding to buoyancy on domestic bourses.

In terms of risks – the key risk is a rise in crude price accompanied by a fall in rupee. Beyond a threshold, this combination is going to push current account deficit to a point where it becomes highly inflationary for the economy and can disturb the fiscal balance.

The recent rise in bond yield is indicative of the same and that surely implies the possibility of both earning downgrades and valuation multiple ranges shifting downward.

The Indian economy has been growing at over 7 percent rate. Is it sustainable and do you expect GDP growth to hit the 8 percent mark soon?

7 percent is pretty sustainable growth for the Indian economy. We had slipped below 7 percent post two large disruption demonetisation and implementation of GST.

For FY19, our estimate for GDP growth is 7.3 percent. For 8 percent growth to happen investment needs a strong comeback. We do not see that happening before FY21.

The dollar-rupee is close to record lows while crude oil prices have started to inch up again. Where do you see them heading?

Rupee traded in the range of 63-68 almost for 5 years. So some depreciation in rupee is fundamentally justified looking at inflation differential and movement in other currencies.

Recently, some extra pressure is also there on rupee due to India being current account deficit country primarily due to large oil import. But I think some depreciation in rupee if happens with lower volatility it's largely positive for Indian equity. Though as in past, rupee would be settling in a new range that could be 69-74 a dollar.

Crude is a real issue for us. With rapidly changing dynamics, oil is a difficult call but structurally in long-term sense with so much work happening in terms of efficiency gains and alternatives I am not a long-term oil bull but in the short term this is the biggest risk to the Indian market and so is a very important trackable.

Do you expect more populist measures like farm loan waivers ahead of state and general elections?

I do not see the fiscal deficit target being grossly violated by current government owing to elections ahead. The risk to the fiscal deficit as of now comes more from current account deficit side. Rising crude and falling rupee beyond a point may see some excise duty cuts leading to lower tax collections.

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?

Retail lenders were already doing extremely good with names like Bajaj Finance, HDFC Bank, it is the corporate lenders that were not doing well. And we have seen a catch up lately by names like Axis Bank, ICICI Bank, and some PSU Banks.

I think retail lenders will continue doing well as the credit penetration has a long way to go in India and also successful private retail lenders are enjoying the benefit of value migration from state-owned lenders.

But selectively one should accumulate good quality corporate lenders now as we are near the peak of NPA cycle and once the investment cycle turns, these corporate lenders will generate higher returns.

The Nifty Pharma and IT indices have been on a tear of late. Do you expect the run to continue in both sectors?

Pharma and IT were the two sectors that were underperforming during 2015-17 due to adverse macro in the US, their largest market. With 2018, their fortunes have changed their target market has stabilised particularly for IT companies and depreciating rupee implies rising margin ahead. But we need to be stock specific particularly among pharma companies as run-up in valuation is not justified for most of the names.

What are your top five bets for next 1 year?

Some of the stocks where one can make investments are:

Larsen & Toubro: Buy | Target: Rs 1,734 | Return: 22%

Management plans to double its revenue to Rs 2 lakh  crore by FY21 and improve margin from 10 percent to 11.6 percent. Management also looks committed to improve return ratio. Order inflow is up by 36 percent YoY mainly led by domestic infrastructure projects. Our near term target is Rs 1,734.

Axis Bank: Buy | Target: Rs 710 | Return: 10%

We believe that rating downgrade cycle has now normalised. Pool BB and below (potential stress pool) portfolio has declined to 2.1 percent against 7 percent in FY16 which shows most of the pain has been recognised.

Advances have grown at an average rate of 17 percent in past 4 quarters with increasing share of retail advances to 48 percent. RoE/RoA is expected to improve to 16 percent/1.4 percent in FY20. Our near term target is Rs 710.

Marico: Buy | Target: Rs 430 | Return: 18%

Promotion and Modern Trade problems that Marico was facing over last two years are getting solved. Gradual recovery in Saffola’s business is expected. The company targets for double digit growth for Value Added hair oil in FY19.

International business is also expected to clock in double digit constant currency growth in the next 3 quarters. The company should report better margin in the second half of FY19 on account of softening of copra prices. Our near term target is Rs 430.

Infosys: Buy | Target: Rs 840 | Return: 13%

After a long time Infosys management issue looks sorted out. Focus is all on volume growth. Infosys signed $1.1 billion TCV of deals recently and cited a strong pipeline, deals and digital to drive growth ahead.

Digital is growing strong at 8 percent QoQ CC (28 percent of revenue) and now even financial service is expected to improve from Q2 onward. Our near term target is Rs 840.

Dixon Technologies: Buy | Target: Rs 3,350 | Return: 16%

The company is in the niche segment of contract manufacturing. Revenue growth is expected at 25 percent for FY19 driven by capacity additions, new client acquisition in TV while backward integration to help margins where electronics faced cost pressures recently. Our near term target is Rs 3,350.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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First Published on Sep 7, 2018 08:13 am
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