Investors could look to invest selectively in small/midcaps just after the Q4 numbers are out. This will also coincide with the general elections when there may be some amount of nervousness in the market, Deepak Jasani, Head Retail Research, HDFC Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Q. It looks like the market is losing steam at higher levels. Do you think this is nervousness ahead of the interim budget?
A. Not much is expected from the interim Budget and hence that may not be the reason for the current market behaviour. Markets are more concerned about the possibility of a global slowdown, soft local IIP numbers, local fiscal situation, lack of visibility of sustained corporate earnings growth and uncertainty arising out of the forthcoming general elections.
Political parties may issue statements and enter into arrangements that will not go down well with investors – both local and foreign.
Worries remain on how the agri-stress and employment situation will be handled by the political parties and to what extent will the equity market be impacted by these.
Q. Most experts are suggesting that the big underperformers of 2018 such as midcaps as well as banking space could turn fortunes for investors in 2019. What are your views?
A. Private banks have performed reasonably well in 2018. As far as PSU banks are concerned, a lot of hopes have arisen out of NPA resolutions (under IBC) and the announced merger of three banks.
Further government has been infusing capital in PSU banks to shore up their capital adequacy levels. On a structural basis, PSU banks can do well only when they see consolidation, better corporate governance, better compensation structure, disciplined/involved workforce and a faster legal system in India.
Due to the impending elections, there may be hopes of these happening under the new regime. This could lead to an anticipatory rally in these stocks a few weeks before the elections.
Sustenance of this rally would depend on the outcome of the elections and the policies of the new government on the above measures.
Mid and smallcaps may perform better in 2019 after a poor run in 2018. In a country like India where a number of companies are many, entrepreneurship is highly prevalent and regulations are in place, investors can ill-afford to ignore mid and smallcaps though they carry higher risks in market downturns.
Investors can hope to gain alpha only in small and midcaps where enough due diligence has been done and reasonable care has been taken to enter and book profits at or near the right times.
In H2CY19, we may see small and mid-cap space starting to perform and beginning to make good the underperformance seen in 2018.
Q. Should investors put their money in mid-cap and small-cap stocks ahead of interim Budget or the full budget which will be tabled after the new government is sworn in?
A. The base for results in H2FY19 will be large and hence performing well in Q3 or Q4 of FY19 may be difficult.
Hence, investors could look to invest selectively in small/midcaps just after the Q4 numbers are out. This will also coincide with the general elections when there may be some amount of nervousness in the market.
Q. With equities in a tough spot, should investors consider diversifying their portfolio towards AIF category or maybe looking at international funds?
A. Investments in AIF have their own benefits and pitfalls. When one is expecting a volatile trendless market, AIF could provide good returns due to their ability to go short. However, in an up trending market, normal equity funds will outperform most AIFs.
Global funds are a good asset allocation tool. Apart from diversification they also provide a hedge against currency risk. A small portion (say 5-15 percent) of your financial assets can be invested in international funds after checking the recent growth in NAVs, sector dependence and their outlook etc.
Q. The upcoming interim budget will set the tone for the elections and poll promises in the next few months. What are your views?
A. An interim Budget or vote on the account as per tradition cannot include too many policy changes. While some reliefs that no political party can dare to roll back (like raising exemption limit for individuals under Income Tax Act, some relief measures for rural population, etc.) can be expected, no measures that will have a substantial impact on businesses are expected to be announced.
While the speech may include a lot by way of a vision statement for the next 3-5 years, its implementation will be postponed to the new government.
Hence we feel that the interim budget or vote on the account may not create a lot of expectations ahead of it or reactions after it.
Q. What are your views on the two IT biggies that have come out with their results – TCS and Infosys? Which one are you recommending to your clients?
A. Infosys posted strong revenue performance, robust large deal bookings and increased its FY19E revenue guidance. However, operating performance was soft-impacted by accelerated hiring, lower utilisation (seasonality impact) and higher onsite-mix (large deal transition).
Buyback/interim dividend announced could provide support. We like Infosys based on (1) strong large deal trajectory ($1.5bn in Q3 and equivalent to 50 percent of FY18 TCV) providing better growth visibility, (2) continued traction in BFSI (NorthAm-led and new accounts driving growth), and (3) Stability in large accounts (top-2-to-10 grew 4.2 percent QoQ).
TCS posted acceleration in revenue (in-line) supported by strong digital traction (53 percent YoY) and continued revival in BFSI. However, margins were lower on increased hiring and higher sub-contracting expense (both indicative of buoyant demand).
We like TCS based on (1) strong growth visibility backed by robust deal bookings ($5.9bn at 20 percent increase over Q1-Q2 and steady duration) and strong deal pipeline, (2) scale and growth leadership in digital with increasing penetration in large accounts (strong growth across client buckets), (3) revival in BFSI vertical and better outlook (outlook of double-digit exit rate for FY19E) supported by reduction in captive intensity, and (4) efficient capital allocation (80-100 percent FCF as payout). Its book-to-bill improved significantly in Q3 to 1.12x from 0.95x (Q1-Q2 average).
Although we like both stocks, the upside potential based on target/s is more in TCS than in Infosys.
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