Market participants are keenly awaiting the earnings of Indian corporates to see if the sentiment among corporates has actually improved, says Sanjeev Jain of Sunness Capital India.
If the consumption-demand doesn't improve over the next few quarters, then there could be risks to earnings estimates, which can derail the market momentum in 2020, Sanjeev Jain, VP Equity Research, Sunness Capital India, said in an interview to Moneycontrol’s Kshitij Anand.
Q) Last week was a roller-coaster for Indian markets but the Nifty managed to recoup losses and hit a record high on January 13. Can we say the worst is over and all eyes are on the Budget and earnings?
A) In the week gone by, the Nifty50 hit a lifetime high of 12,311.20. The primary reason for this buoyant rally were large investments by foreign funds together with steady participation of domestic funds.
FPIs and DIIs have remained net buyers of around Rs 738 crore and Rs 446 crore, respectively, in the equity cash segment, so far, in January.
High expectations from upcoming Union Budget as well as steady quarter earnings of Indian corporates made the market sentiment buoyant.
I strongly believe that the government may come out with a number of reforms and initiatives to boost the economy. The slowdown in the economy may be at the bottom and we may see revival in the economic activities, possibly from early FY21.
The good thing is that the government is now more focused on boosting consumption and demand, which was a nagging issue throughout 2019.
Q) Any crucial events that investors should take note of that can impact D-Street sentiment?
A) The Index of Industrial Production (IIP) number came on Friday evening. After contracting for three consecutive months, it grew at 1.8 percent in November on the back of improving manufacturing sector.
It is a good sign for the economy, as IIP has turned positive now. On the other hand, the US-China Phase-1 trade deal is to be signed on January 15. If done, it will boost the market sentiment further. Any adverse/delay may dent the sentiment.
Indian corporates have started reporting their Q3FY20 results. Market participants are keenly waiting to see the earnings for getting the indication on whether sentiment among corporates has actually improved or not.
Also, on February 1, 2020, our finance minister will present the Union Budget for the year 2020-21, a balanced budget announcement is expected this time.
But, yes, it will largely clear the picture that how the government is ready to handle the ongoing tough situation and boost the economy by way of generating demand and consumption.
On the flip side, if the consumption-demand doesn't improve over the next few quarters, then there could be downward risks to earnings estimates, which can derail the market momentum in 2020.
Other global factors like Brexit deal, presidential election in the US and the onset of another round of asset purchases by the Bank of Japan, European Central Bank, and the US Federal Reserve will be in focus as well.
Q) What are your views on Infosys results? What do you recommend–buy, sell or hold?
A) Infosys reported a mixed set of Q3FY20 numbers. Its topline and bottomline growth was broadly along expected lines, while the operating margin was below expectations.
The company has raised its revenue outlook for FY20 in constant currency to 10-10.5%, from guidance of 9-10% given in October.
The company also said that its board's audit committee has completed the independent probe into the anonymous whistleblower allegations and found "no evidence" of financial impropriety or executive misconduct.
The favourable outcome of the internal audit committee regarding the whistleblower allegations and raising of revenue outlook may be positive for the stock. Hence, the investor should hold the stock.
Q) Three stocks that you think are good breakout buys, given the sharp recovery seen in the week gone by.
A) From the investment perspective, we recommend the following stocks for a 9-12 month time frame:
In Q2FY20, the bank’s advances and deposits grew by ~15 percent and 18 percent on a YoY basis to Rs 117545.42 crore and Rs 13,9521.39 crore, respectively.
The bank’s healthy business growth has helped it to improve its Net Interest Income (NII) by 10 percent YoY to Rs 1,123.78 crore, which led to boost its bottomline by ~57 percent YoY to Rs.416.70 crore over the same period.
Consistent strong growth in its total business increased the bank’s market share. Its advances and deposits market share has gone up by 4bps and 7bps YoY to 1.16% and 1.07%, respectively.
The bank is well capitalised to support its growth trajectory with 13.98 percent of its Basel III-Capital Adequacy Ratio (CAR), which is 290bps higher than the regulator’s stipulated norm.
The bank’s continued focus on the retail banking front has helped it to improve its low-cost deposits base ie CASA ratio by 11bps QoQ to 31.55 percent.
In Q2FY20, its return on assets (RoA) and return on equity (RoE) improved by 27bps and 356bps YoY to 1.03 percent and 12.06 percent, respectively.
Improving balance sheet, strong capital base, healthy return ratios coupled with management’s confidence on the asset-quality front as well as business growth, positively impacting Federal Bank Ltd.
The company is a market leader in most of its product categories and continues to gain share. As on September 30, 2019, the market share of its flagship products like coconut oil, Saffola–super-premium refined oils, value-added hair oil, serums stood healthy at 60%, 75%, 35%, and 64%, respectively, in terms of volume.
Its India business contributes 78 percent of the consolidated sales, with the domestic hair oil portfolio (Parachute coconut and value-added hair oils) contributing ~63 percent of overall sales.
Marico is financially robust in the face of the volatile markets as the cash position of the company is within a healthy range and more than sufficient to cover other upcoming liabilities and business expansion.
As per the company, Marico is open to strategic acquisitions as the leverage ratios are comfortable. In the absence of any strategic acquisitions, the company will continue to maintain a healthy dividend payout.
Strong growth in financials and debt-free balance sheet helped the company to improve its return ratios.
For the last several years, the company has maintained its RoE and return on capital employed (ROCE) above 30 percent and 40 percent, respectively.
In FY19, the company sold 131936 M&HCVs out of which 1,15,613 units were of M&HCV trucks, registered a growth of ~13 percent on a YoY basis.
A significant growth had seen in its LCV domestic sales, the company reported robust 25.5 percent YoY growth in LCV sales. As a part of the power solution business, its engines sale grew by 16.6 percent YoY to 21,859 engines over the same period.
Recently, the transport ministry issued draft guidelines for setting up authorised vehicle scrapping facilities.
We believe the policy, if implemented, may help reverse the current cyclical downturn and Ashok Leyland will be the biggest beneficiary as the company’s revenue and profits accrue mainly from trucks. The positive impact of replacement demand can be significant.
With new product launches set for the next financial year, the government’s efforts on demand revival coupled with there is an expected pre-buy in FY20 due to the introduction of BS-VI norms from the next financial year and other demand impetus such as discounts, festive season buying, positively impacting Ashok Leyland Ltd.
Q) Why have small & midcaps stocks started performing recently? Is it the FII flows or pre-Budget euphoria catching up?
A) It is a combination of both. The last couple of years were a difficult phase for the Indian equity markets, especially for midcap and smallcap investors.
We believe the year 2020 will be the year of quality midcap and selective largecap companies. Investors should keep the focus on stock-specific and it is the right time to invest in quality midcaps and selective largecaps stocks, where valuations are inexpensive.
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