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Last Updated : Apr 11, 2019 01:00 PM IST | Source: Moneycontrol.com

'Good times expected for mid and smallcap companies over next 3 years'

A stable government will give a good fillip to the markets as it removes economic & policy uncertainty and portfolio inflows, said Aniruddha Naha of DHFL Pramerica Asset Managers

Kshitij Anand @kshanand

Mid and smallcap companies are expected to do well in the next three years as they have seen deep correction recently and the earnings visibility for such companies has improved now, Aniruddha Naha, Senior Fund Manager-Equity, DHFL Pramerica Asset Managers, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) We hit record highs earlier this month but the momentum fizzled out. Do you think investors should be worried?

A) Global slowdown concerns have clouded growth expectations in some of the major economies across the globe. In a period of six months, bond yields' expected trajectory globally has swung from moving north to a more benign or even a falling trajectory.

This augurs well for an economy like India. India will still remain among the fastest growing economies across the world. Earnings growth across market capitalisation should look better in the coming financial year.

With global growth looking weak and Indian earnings growth looking more positive, investors can expect decent returns in the next financial year.

Q) What is your target for Nifty for FY20?

A) We expect Nifty earnings to grow around 20 percent+ in FY20, primarily supported by corporate banks earnings.

Q) Which theme is looking more promising: large, mid or smallcaps?

A) Earnings across market capitalisation will continue to see improvement. Mid & smallcaps have a marked difference in the quality of their balance sheets compared to three years ago.

The debt levels in the balance sheet have come off and they present a far stronger balance sheet than what it used to be. With utilisation levels picking up and cleaner balance sheets, one can expect decent growth in revenue and profits for the mid and small-cap companies.

A combination of a deeper correction in the mid and smallcap companies compared to largecaps and stronger visibility of earnings augur well for such companies in the next three years.

Q) Which sectors are likely to remain in limelight in FY20 amid election outcome and formation of the new government and why?

A) Corporate banks earnings and asset quality looks to have bottomed out. A stable government and cleaning up of balance sheets should bring growth back into focus which augurs well for corporate banks.

Cement and infrastructure companies with clean balance sheets should also remain in the limelight. We expect investment activity levels picking up over the next three years and that will reflect in better earnings prospect for both cement and infrastructure companies.

We remain positive on small ticket discretionary items. Increased penetration of no-frill bank accounts and direct payment of subsidies into these could lead to discretionary consumption.

Since the amounts involved per account are not large, we believe the consumption will get reflected in low ticket discretionary items rather than the high ticket items.

Q) What are the factors which are likely to impact markets in FY20?

A) There are both positive and negative factors:

Positive factors:

• A stable government will give a good fillip to the markets as it removes economic & policy uncertainty and portfolio inflows

• Credit growth has been strong and a good monsoon should help in continuing the momentum

The negative impacts could arise from:

• High oil prices
• Strong recessionary trends globally causing a global slowdown and

• A fractured political mandate.

Q) How is FY20 likely to pan out for investors and markets at large?

A) As earnings get better and the political event is over by the first quarter of FY20, one can definitely expect earnings to support the overall broader market and the market move will get broad-based. There is a decent probability of both earnings and returns surprising investors positively.

Q) Top five value stocks which investors can look at for FY20?

A) Sectorally, we remain positive on corporate banks and constructive on certain PSU banks after a long time. Good credit growth from investment oriented sectors like infra, cement and steel should drive credit growth for the next couple of years.

The IBC resolution process will alleviate to a large extent the NPA issues with corporate & PSU banks, which should be helpful.

We also remain positive on capital goods, cement, steel, and infra. Across industries, capacity utilisations are hitting 75 percent and will probably cross 80 percent in the next 12-15 months.

With low leverage, it is likely one can expect capacity expansions happening, which should augur well for the industry.

A capex cycle usually starts with growing working capital loan demand, a phase which we are currently going through, followed by brown field and green field capital expenditure.

Discretionary consumption will be a long term theme which will proxy the increasing per capita GDP growth in India.

Many of them are trading on the expensive side, but with a long term view and during price corrections, which could be due to weak results, this is a segment we like.

Q) How is your Midcap & Diversified Fund positioned?

A) The Midcap fund invests into companies with good earnings visibility. Since last October we turned constructive on the markets. Till about January, the market rally was concentrated among a few large and midcap names, in spite of the fact that earnings were broad based.

We went about identifying companies where earnings was coming through, but stocks were not performing due to prevailing uncertain sentiments. Both funds i.e. DHFL Pramerica Midcap Opportunities Fund and DHFL Pramerica Diversified Equity Fund, have an overlap against their index of below 40 percent, clearly signifying that the endeavour was to look beyond the indices for companies which are showing growth.

The sentiment in the market has changed for the positive and the rally is now broad-based than earlier. In such a situation, where earnings visibility is good and sentiments are positive, a broad-based rally should augur well for the funds.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Apr 11, 2019 01:00 pm
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