We sense that market may see some respite from the poor performance of mid and smallcaps in the near term, said Vinod Nair, Head of Research at Geojit Financial Services
Midcap valuations are still high at 20 times while for smallcaps they are at 14 times on a one-year forward P/E, but this is the time to start accumulating good quality mid- and small-cap stocks, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.
Last 10 years’ data suggests that bulls dominated D-Street in the last 5 out of 10 years. So how is June likely to pan out for investors?
We have a conservative view on the market for 2018, which was initiated since January and is still continuing. This was largely due to premium valuations, increase in interest rate, global and domestic political risks and lack of earnings growth.
On a year-to-date (YTD) basis, the market has been underperforming led by hike in bond yield and downgrade in earnings, within which mid and smallcaps had vast correction in price and valuation.
Recently, we are seeing some respite in the market lead by good economic numbers for Q4 GDP and proactive decision by the Reserve Bank (RBI).
The carnage seen in the mid & smallcap space is likely to see a respite as a large portion of the knee-jerk downgrade in earnings is over, domestic political risk is being factored in and hope on future business outlook is high.
From the perspective of flows, FIIs became net sellers in just 3 out of the last 10 years. But, the way they have been selling in the last 2-3 months, do you think June could turn out to be a negative month?
FIIs have been selling their exposure in emerging markets (EMs) due to increase in global risk and bond yield. Yields are still on the higher side but stabilising and awaiting to see the latest update from FOMC.
Though the trend may be up but a large portion of it may be factored in by the market. We sense that market may see some respite from the poor performance of mid and smallcaps in the near term.
While the consumption story is getting better led by Q4FY18 GDP growth, improvement in rural market and good start to monsoon are key positives.
What is your call on Sensex/Nifty by year-end?
We had a target of 10,400 for Nifty, which we are continuing given lower than earnings growth of FY18 than anticipated. We are valuing Nifty at a P/E of 16.5x on a one-year forward basis assuming 15 percent growth in EPS which is lower than 17.5x we valued previously.
This is due to increase in global risk, reduction in global liquidity and lack of earnings growth till date.
Top five stocks which hold potential to give multibagger returns in the next 2-3 years?
InterGlobal Aviation (the parent company of IndiGo airline) is one of the most efficient low cost carriers (LCC) with a market share of 40 percent in the Indian aviation sector.
IndiGo passenger traffic grew by robust 31 percent CAGR versus industry growth of 15 percent CAGR, over FY14-FY18. Going forward, expanding market presence through fleet addition and firming up its regional connectivity plans augurs well.
IndiGo’s fleet comprise of 15 percent more fuel efficient models which will cushion its margins and market share even at times of higher oil prices.
In the long-term risk related to volatile oil prices is likely to come down. We remain constructive on IndiGo given RoE of 40 percent, efficient operations and strong balance sheet.
NBCC is a Navaratna Enterprise engaged in project management consultancy (PMC), Engineering Procurement & construction (EPC) and real estate business. Current order backlog of Rs 80,000 crore provides strong visibility for the next 5 years.
We expect execution to ramp up in coming quarters as Rs 10,000cr worth redevelopment project started at ground level with an execution period of 2years. NBCC is at sweet spot considering its huge order book, limited competition and expertise in executing large projects.
Big projects like Pragati maithan (Rs 2,500cr), Irrigation project in Maharashtra (Rs 1,000 cr), redevelopment of Nauroji nagar (Rs 2,500cr) started with an estimated execution period of 24 months. Given strong earnings outlook and executional capability we continue maintain a Buy rating for the stock.
Normal monsoon and more state subsidy for doubling the agricultural growth will continue to drive demand for tractors for FY19. EL's expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies.
Revenue from Construction equipment and railway segments will continue to reflect sizable improvement in FY19. We expect revenue and PAT to grow by 15 percent/23 percent CAGR over FY18-20E factoring 13 percent YoY growth in the tractor sales and 18 percent in Construction equipment.
We expect EL to trade at a premium valuation of 25x (FY20E EPS) given its strong earnings outlook & massive government push for road infra projects.
Ashok Leyland (AL) is the second largest commercial vehicle manufacturer in India to witness numerous tail winds like government road infra spending, strategy of defence and Electric vehicle.
AL's growth in the higher tonnage vehicle was 247 percent on a YoY basis post the implementation of overloading ban in some northern states. The industry is likely to witness a demand of 600-700k vehicle if 15 year ban is enforced across the country.
AL holds 95 percent market share in this category (35.2t- 40.2t) and will be a direct beneficiary. We expect AL’s revenue to grow at 17 percent CAGR over FY18-20E- factoring 13 percent volume growth in M&HCV and 23 percent in its LCV business.
Do you think after what happened in Karnataka, the Modi government will become populist in the run-up to the general elections 2019? How are markets going to react?
We feel that BJP has done well in the Karnataka election more than doubling its strength and becoming the largest party in the state. Regarding the risk of becoming more populist, that is limited since they already are under the plan of focusing more on rural and agriculture sector as indicated in the Union Budget 2018-19.
NDA has been doing well in the last set of state elections and market is likely to take this positively for the next general election.
Twenty-one public sector banks (PSBs) have incurred losses totalling Rs 25,775 crore due to banking frauds in FY18. Do you think it will be a wise decision to catch this falling knife?
Out of 21 public sector banks, 19 PSBs have reported PAT losses of Rs 87,000 crore for the year ended FY18 largely on account of higher provisioning for bad loans.
The new norms of RBI on bad loans and increased NPAs will adversely affect the Rs 65,000-cr capital infusion plan of the government for FY19.
Insufficient capital infusion exercise may trouble the PSBs in maintaining the regulatory capital adequacy requirement. It is advisable to keep away from these stocks.
Most of the results for the quarter ended March are out. How do you rate the performance of India Inc? Also, your top 5 stocks to buy post earnings season and why?
The fourth quarter results so far have been trailing below the market expectation. Taking as an example, Nifty50, excluding the result of SBI which has given extraordinary losses factoring stressed assets, expectation was an average growth of 16 percent in PAT on a YoY basis but actual it is only 2 percent growth.
The good performing sectors are NBFCs, Metals and consumption-oriented segments like FMCG, auto and retail. The worst performers are banks, pharma, telecom and cement.
Mid & Smallcap stocks have taken a beating in the last 2-3 months. Both S&P BSE Smallcap index and Midcap index are down on a year-to-date basis. What should investors do with stocks that have seen double-digit correction?
Year-t0-date, from the respective 52-week high for indexes, Nifty50 corrected by 8 percent, Nifty Midcap100 by 15 percent and Nifty Smallcap100 by 20 percent.
After the strong correction, prices had become very attractive and valuation had reduced marginally. In case-to-case basis, some prices had become very lucrative.
Valuation was lower but not cheap enough. On a one-year forward basis, (Bloomberg) mid-cap valuation reduced by only 10 percent while for smallcap it corrected by almost 20 percent.
This reduction in P/E is lower than price correction because the actual result in the second half of FY18 was much below than anticipated, resulting in huge downgrade in forecast of FY19 and FY20 impacting the future valuation.
Valuation of midcaps is still high at 20x while for small cap it is at 14x on a one-year forward P/E. This is the time to start accumulating good quality mid and small-cap stocks.
Moving from stocks, most of the funds based on the small & midcap theme are bleeding. What are you suggesting to your clients – hold them and continue SIP, add more money on dips or book profits, if any?
During the start of the year we were suggesting to increase the exposure in largecaps compared to midcaps. We continue to stay with this outlook while along with largecaps we also suggest to have higher exposure in consumption-oriented stocks and businesses.
What is your call on crude oil, and where is it headed by December 2018? Do you think higher prices will make aviation, OMC, tyre stocks slightly unfavourable?
Brent crude has fallen from USD 80/bbl to US 75 this week on reports that Saudi Arabia and Russia are considering easing of production cuts on the back of new US sanctions on Iran. In the near term, Brent crude prices are likely to trade in the range of USD 70-75/bbl.
However, on a slightly long-term basis, the prices are likely to trade in a range of USD 65-70/bbl. Jet fuel accounts for 35-40 percent of the overall airline costs. The ATF has risen by 23 percent on a YoY basis, given higher fuel prices, air fares are expected to increase to adjust margin.
Meanwhile any decision on inclusion of Jet fuel under GST will significantly improve the fortunes of this sector. Oil marketing companies are on a consolidation mode on renewed concerns subsidy burden due to election year. We might see some impact on the earnings of OMCs in the near term due to higher prices and price controls from government.
Do you think we will have a normal monsoon in 2018? What will be its impact on sectors?
Monsoon has hit the southern peninsula before the forecast, market optimism will increase supporting the consumption-led story and rural economy.
Given the government's emphasis on agriculture and allied activities, the effect of 3rd consecutive normal monsoon is likely to be a bumper to the rural economy which is about 45 percent of India GDP. We are very positive on staple and discretionary consumption, auto, durables and agro segment.
Flows into mutual funds have slowed. Is domestic inflow story coming to an end?
We don’t agree to that, we feel that flows to mutual funds will continue to be on the higher side given the trend of financialisation of assets in India. Well it is completely positive that we will have seasonal change in the strength of the inflow.Also, given the volatility till year and headwinds like increase in oil prices, slowdown in credit growth and higher inflation can impact the flow of funds in the short term.