We believe that equity provides the best investment option for long-term as regards post-tax returns.
Valuation is high for the short term, but from a 2-3 years perspective, we believe Indian markets can give returns higher than mid-teens, AK Prabhakar, Head -Research at IDBI Capital said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) Geopolitical concerns continue to weigh on D-Street. But, history suggests that any dips caused by such news events present a great opportunity for investors? Can we correlate it with war like situation which gave investors multibagger returns if they invested on dips?
A) We believe that, in the worst case, Indian markets would see correction only for the short term. We believe that the improvement in the structural story in India from FY19 onwards would still remain very much intact.
Such correction would be an excellent opportunity to invest from a 2-3 years perspective and believe that domestic market focussed companies would outperform.
Q) Top five stocks/sectors you think could produce multibaggers in next 2-3 years?
A) Five stocks which I think could deliver stellar returns include names like:
Q) Analysts, as well as research firms, have already started lowering their estimates for GDP growth. The gap between the Nifty’s PE and economic growth is at a 12-year high. Is it time to turn cautious about valuations?
A) Two parts to the answer – 1) valuation are high for the short term, but from a 2-3 years perspective, we believe that Indian markets can give returns higher than mid-teens.
2) We believe that there are sectors and stocks within these sectors where valuations are still reasonable given the expected uptick in earnings and return ratio profile.
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 percent premium to a long-period average of 17.4x. Sensex P/B of 2.8x is at 4 percent premium to its historical average. How should investors read through this information?
A) As explained in the previous point, from a 2-3year perspective we still believe that Indian markets can give decent returns. And, investors would gain more by being stock-specific on domestic market focused sectors.
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) We believe that equity provides the best investment option for long-term as regards post-tax returns.
Q) What is your call on small and midcap stocks which saw double digit cuts in the month of August? Is it time to bring down holding in these stocks because GDP growth is unlikely to recover soon amid GST implementations?
A) One needs to be very stock specific in case of small and mid-cap stocks. In this space, the management and company’s business model holds the key.
If both are stock and the company is impacted by temporary issues in the sector, like that of GST, then the decline in the stock price in short term is an opportunity to buy. We are positive on the small and mid-cap space and recommend being stock specific.
Q) Why are FPIs fleeing India? They have already taken close to $2 bn from India equity markets in the month of August. Is it temporary or will the trend continue?
A) Two answers to this question – 1) one should not make inflows/outflows for a month by FIIs as a trend. We expect FIIs to remain positive on Indian markets from medium to long term point of view; and
2) FII flows are positive if we take overall equity inflow so they can be sellers in the secondary market while they have invested in primary market or QIP. We saw outflow for just 2-months in the Calendar year, which is still positive.
Q) Indian equities are trading at 21.2x FY18E earnings. All key markets globally continue to trade at a discount to India. However, India’s RoE remains superior to most EMs, an important differentiator for valuation premium. Is it a bullish or a bearish sign?
A) As mentioned in earlier points, we believe that the valuation of Indian markets is reasonable from the 2-3year horizon. We are confident of the improvement in earnings growth benefiting from the reforms taken by the Indian government.RoE is an important ratio in the overall context of valuation and India stands well as that regards, and the growth that India can generate other countries can’t be matched.