Investors should focus on valuation metrics i.e. companies with reasonable price to book value backed by improving operating metrics are likely to outperform.
The earnings seasons ended on a positive note with more companies reporting in-line or better than expected earnings. For Nifty 50 companies, 30 companies reported in-line or better than expected results while the other 20 companies missed the estimates.
Due to this, the earnings estimates for the Nifty50 index was cut by 5 percent and 2 percent for FY19 and FY20, respectively. IT and Capital Goods sectors have seen earnings upgrade by the consensus, while other sectors have seen earnings downgrades.
Even though other sectors have seen earnings downgrades but except for automobiles, telecom and pharmaceuticals downgrades have not been significant.
While the financial performance can be considered in-line with expectations, but the operating performance was ahead of expectations. Margin pressure was seen in certain sectors but with crude prices cooling off from the recent highs, the challenges of margin pressure are slowly abating.
Post earnings, the broad picture for the market appears to be constructive. While the earnings picture is constructive, the political environment is getting charged.
The market volatility will continue to remain at elevated levels ahead of the state election. Volatility manifests into higher equity risk premium which in turn mean that valuation multiples across sectors are likely to be capped.
This scenario often augurs well for value investing. Moreover, the banking sector is slowly coming out of woods with two important banks ICICI Bank and Axis bank showing improving operating and financial metrics.
Thus, investors should focus on valuation metrics. Companies with reasonable price to book value backed by improving operating metrics are likely to outperform.
Banking sector stands out, and private banks, both large and mid-sized banks are likely to gain market share over the medium-term are likely to perform well. ICICI, Axis, Federal, and DCB are likely to outperform over the medium term.
Apart from the banking sector, telecom sector gained a lot of attention in the recent past based on market sentiments of an impending price hike by Reliance Jio.
While Reliance Jio has categorically not indicated anything but considering the stress in the sector a spate of price hikes cannot be ruled out. Bharti has managed to hold its course during this turmoil in the sector in terms of revenue and subscriber market share.
Valuations on P/B for Bharti are reasonable, and it is more likely to gain more from price hikes (if happens) as Vodafone-Idea is still chalking out its strategy.
Cement and Infrastructure plays are the other areas where there could be investable stories. The cement price hike is likely in this quarter and players like Ambuja could be the gainers.
Infrastructure stocks are also cheap and have healthy order books. This could be another area to focus. Overall, the market seems optimistic with range bound valuations but options galore with the right value investing strategy.Disclaimer: The author is Head of Research at Reliance Securities. 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.