Valuation of the broad market continues to be on the higher side and needs to settle as earnings growth is likely to downgrade further, says Vinod Nair of Geojit Financial Services.
In the short term, we are expecting some relief in the market given a big correction in the last two months and rebound in technical factors, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.
Q) What is your assessment of the market at current level?
A) Currently, we have one-year forward base-target of 10,250 for Nifty50, which is reduced from 10,400 in Q1FY19. This is based on 12.5 percent earnings growth in FY19 and 15 percent earnings growth in FY20, which is lower than the market forecast of 15 percent and 22 percent respectively.
In the last two quarters, the market has reduced the earnings growth for FY19 from 20 percent to 15 percent, while we have reduced from 15 percent to 12.5 percent.
Our reduction is based on H1FY19 numbers which are likely to be in a range of 5 percent to 10 percent as per the actual result of Q1FY19 and on-going Q2FY19. We are valuing the market on one year forward P/E of 17.5x while the market is trading today at 16.4x.
The intrinsic value of equity as an investment asset is under evolution. In the world, we are seeing changes in the value of different assets like currencies, debt, equity, commodities, and others. This adjustment may take some more time.
But in the short term, we are expecting for some relief in the market given a big correction in the last 2 months and rebound in technical factors. We were deeply below the 200-days moving average and oversold region.
India’s VIX had risen to one year high of 22.8 and receding, similarly Government’s 10-year yield, rupee and oil are curbing. Consensus between Government and the Reserve Bank of India, possible deal between US and China and global cues are helping the market.
Q) Sensex and Nifty are up slightly from last Diwali but a carnage has already happened in small & mid-caps. Do you think the selling pressure will continue in the broader market until next Diwali?
A) We see a bounce in the near term. However, the extension of the rally will depend on all the factors mentioned above. Valuation of the broad market continues to be on the higher side and need to settle as earnings growth is likely to downgrade further.
We feel that this phase can continue for the next one to three quarters, bringing room for SIP type strategy in the market and create a value portfolio to generate wealth in the long-term.
Q) What are the major factors which will impact markets till next Diwali?
A) Rising Yield: The yields in the global market are surging and currency is getting very volatile. Today, we are quite unsure of the possible rate hikes going forward, and the magnitude of its impact on the financial market, especially on NBFCs in the domestic market.
As a result, FIIs have turned cautious on the emerging markets and selling in India too, whether it will impact the domestic inflows and fiscal math in the future is a risk to the domestic market.
The Elections: History teaches us that general elections have never impacted the intrinsic value of the country in the long-term, but definitely brings volatility in the short to medium-term depending on the stability of governance, macro, and micro situations.
This time we have important state elections before the national election which could have a drag effect on the market.
Oil prices: Oil prices after hitting a high of $86/barrel in early October declined to ~ $73-$70/barrel as production from major producers like Saudi Arabia, Russia and the US are increasing.
Additionally, concerns over trade war between the US and China and slower growth in the global economy is also dragging prices. Till the oil prices get stabilised, it’s going to have an impact on related sectors and fiscal target.
Q) Top five stocks which investors could buy on this Muhurat Trading of 2018 with an investment horizon of 2-3 years?
A) HDFC Bank: We are structurally positive on HDFC bank given its top-notch asset quality, robust retail franchise and strong balance sheet growth. Further, with the bank’s superior liquidity positioning (liquidity coverage ratio of ~118 percent as compared to 90 percent required), the bank would benefit from the credit squeeze to NBFCs and consolidation of PSU banks.
Escorts: We believe the long-term fundamentals of the tractor industry is solid. Though in the near-term the pace of central & state government’s policy may slow down due to elections and fiscal shortage.
But, we expect the status quo on the Governments fiscal discipline in the long term and 25 percent earnings CAGR over FY18-20E, inducing confidence in the stock.
Asian Paints: We expect volume to grow at double-digit ahead of festival season and reduction in GST rate. Margin pressure may remain in the short term due to the rise in oil prices. We, therefore, expect one more price hike in the coming quarter which will negate higher input price.
Cadila Healthcare: The launch of new products such as gAsacol had (not expecting further competition in the next two years) and gToprol xl, will ramp up sales in the US market. Management has guided for ~50+ launches in FY19 which is expected to improve their margins.
Considering their strong financials, low valuations and aggressive expansion plans we believe that Cadila Healthcare will continue its steadfast growth rate.
HCL Technologies: We believe, healthy outlook for IMS, strong deal signings and growth momentum in mode 2 and 3 are expected to be the drivers for the long-term growth. In addition, HCL has a lower onsite risk as 65 percent of its workforce in the US is locals. On a 1-year forward basis, the stock is currently trading at 13.5x which is a 27 percent discount to IT bellwethers (Infosys and TCS).
Q) Which sectors are likely to remain in focus till next Diwali?
A) Certainty in business will be the key factor influencing the market’s sustainability and attractiveness of the respective stocks and sectors. Stable names are likely to do better or outperform in the market.
Sectors like FMCG or Consumption oriented IT and possibly Pharma too assuming that the worst is over in terms of pricing issue in the US market can do better.
At the same time, we also feel that export-oriented stocks & sectors will also perform well like Chemicals and Auto & Ancillaries. The sectors which are likely to be under pressure are those which lack financial stability like Financials, NBFCs, and Infrastructure.
Q) What should be the ideal portfolio construction methodology for investors for Diwali 2019? Do you think investors can look at cutting down on equity exposure because the most portfolio of investors have turned red in 2018? What should be the ideal percentage of equity, debt, gold, and cash in your portfolio? (Age of investors is 35-40 years)
A) Given the conservative view on the market, the exposure to equity for an average risk-averse investor may be in a range of 40 percent to 60 percent (including direct & MF investments in the domestic and international market).
Whereas, the rest can be largely spread on short-term debt and gold as per their objective and risk-taking ability.
Even though equity is likely to be volatile in the next one to three quarters, it will generate wealth in the long-term creating opportunity to own brands at attractive valuations.
Q) What is your advise to investors this Diwali considering the fact every trick in the book seems to have failed to protect portfolio destruction?
A) Though ups and downs are part of the investment process, in which timing is a secondary factor while the ability to understand the change in risk and churn as per the need of the market is more important.
To build a portfolio with key brands, sectors, and leadership with a well-diversified mix of Large and Mid-caps and patience to stick with the objective is the key. Equally to understand the mistakes and reduce or book losses & gains, improves the portfolio’s objective.
Q) How are you reading September quarter results from India Inc?
A) Considering Nifty50 as a benchmark, Q2 has been a slippage against the high expectation. The market started this quarter with an expectation that Nifty50 index stocks will earn about 15 percent growth in PAT on a YoY basis.
As on November 2, 38 stocks have given results where PAT is down by -2 percent. If we remove the loss-making company’s like Tata Motors, PAT is up by 4 percent on a comparable basis of 10 percent.
This is more like a replica of Q1 result which had a growth of about 5 percent. We are bound to see a further downgrade in earnings growth over the next one to two quarters.Though market seems to have factored some part of the cut in earnings growth, for example; we had started this year with an expectation of 20 percent growth in FY19 which has reduced to 15 percent, but it has more to go.