"The biggest expectation out of the Union Budget 2018-19 would be more focus on job creation. Hence, apart from focus on rural economy and infrastructure development thrust, key areas of job creation like the manufacturing sector, especially the textile sector would be focused upon," Ajay Jaiswal, President – Strategies & Head of Research at Stewart & Mackertich Wealth Management said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q. 2017 has been a great year for Indian equities as the market grew by around 25 percent. Do you see same kind of rally in 2018 also and what is your Nifty target for December 2018?
A. We expect Indian markets to remain highly volatile in CY2018 led by domestic and global factors. While we do not expect a similar run on Nifty as in CY2017, we do expect it to generate around 15% in CY2018. We expect Nifty to trade around 16.50 times FY20(E) EPS of around 734 towards the end of December 2018, which leads us to a level of around 12111. However, select stocks and sectors would continue to outperform benchmark returns by a wide margin.
Q. What are the next key events (or themes) to watch out for the year 2018? Will those events drive the market up or down?
A. On the global front the biggest event would be the New Fed Chief and mid-term performance of US president as most of the key measures with respect to promises made by him may be translated in CY2018 like Infrastructure redevelopment. Other is Fed rate hike which is being talked to be around 75basis points hike in CY2018. Other key global events to watch are the continued effort of China to shut down excess capacities to curb pollution which may continue to drive commodity prices along with increase in demand from US, Europe and India. Among the domestic events, election in several key states will be keenly watched, as the marginal victory in Gujarat may lead to several policies that be targeted for the rural poor and small business men alike. We strongly believe that both global and local events are likely to be constructive in nature which may be positive for the markets. However, severe bouts of volatilities cannot be ruled during CY2018.
Q. The domestic liquidity supported markets in the year 2017. Will that liquidity support continue in 2018 as well or do you see some tapering of flows?
A. The domestic liquidity is likely to continue in financial assets as the Modi Government has managed to disable the flow of unaccounted money which usually used to go to Real Estate and Gold, and also to some extent of unofficial lending. On the Retail front, financial literacy, improved long term domestic economic prospects, young and aspiring population will continue to invest in equities through mutual funds and HNI’s through PMS and structured products.
Q. Everyone is saying corporate earnings were far better-than-expected in September quarter. Do you see December quarter earnings laying foundation stone of earnings recovery?
A. We believe the foundation stone of earnings recovery will be laid in the fourth quarter of FY2018 as most of the disruption arising out of GST implementation would have had its impact in the first 2-quarters post GST implementation. Also, the clampdown by the Government on shell companies and regrouping of subsidiaries by most companies in parent companies may lead to earnings recovery and upward surprise in earnings in quarter four of this financial year. December 2017 ending may signal mixed earnings picture.
Q. Apart from earnings, the next big event the market will watch out for will be Union Budget. What are you key expectations from the last full-fledged Budget, especially after Gujarat elections results? Top five sectors which you think stand to gain the most from the upcoming Budget 2018?
A. The biggest expectation out of the Union Budget 2018-19 would be more focus on job creation. Hence, apart from focus on Rural Economy and Infrastructure development thrust, key areas of job creation like the Manufacturing Sector, especially the Textile sector would be focused upon. The Government has already announced tax sops to the MSME segment in the previous Budget, we believe the bracket may be raised to 100 crore from 50 crore and special incentives may be announced for those corporates that create jobs. Top 5 sectors to watch out for in the coming year is Infrastructure, Capital Goods, Agro-Chemicals & Seeds, Engineering, and Textile
Q. As we move to 2018, what are your 5 best picks for 2018?
A. SBI
PSU Banks are a major re-rating story with massive bank recapitalization and clean-up of balance sheets. SBI’s asset quality may remain a near term concern, however, an extensive review of its corporate loan exposure should help the bank clean up its balance sheet, which is likely to boost provisions and impact margins in the near term. Cost controls and timely resolution of bad loans are the company’s key profit drivers.
A strong lending rebound is expected as its merger with associates should start generating cost synergies. Front loading of provisions for accounts identified for bankruptcy referral, improving NIM which was up 7bps in Q2 and lower operating costs augur well for SBI. We expect a 20% absolute gain on the stock in the next 1 year.
Increase in curbs in China, a positive Global Growth outlook, Surge in Zinc and other base metal prices.
Company is on a right growth track and their acquisitions over last 5 years have started to cash in for them. The Company has reduced their debt by another INR11K Cr during Q2 FY18 and have long term debt of INR34K Cr while their Gross Debt lies low at INR52.2K Cr as of now, unlike most mining & resources majors.
We foresee the Company coming out with good results for the 2nd half of FY2018 as the demand for base metals are gaining momentum over recent times. The rise in Crude Oil prices and rally in international metal prices have pumped more confidence in major economies. The present higher price levels of commodities and rising crude prices will also add up to their benefits. We value the Company at an EV/EBITDA of 5.5x for FY19E driven mainly on increase in topline with existing and forthcoming operations and arrive at a Target Price of INR402
Indian Hotels still remains the undisputed leader in terms of geographical presence and room inventory. Over the years, the company has built a vibrant portfolio catering to different hotel categories including premium hotels, mid-market hotels and budget hotels. Its share from contract management continues to increase, raising possibilities for better margins.
The five-year period marked by oversupply in the Indian hospitality sector is coming to an end. Improved occupancy and ARR’s which are the signals of better days are ahead for the hospitality industry and for IHCL in particular.
The Indian aviation sector is in an up cycle, the sector is operating at lifetime high passenger load factors coupled with a passenger growth rate which is increasing at the rate of over 17-18% over the past 18 months. This bodes well for the hospitality sector. We value the Company at an EV/EBITDA of 22x for FY19E driven mainly by increase in their top line and arrive at a target price of INR169.
Rallis recent launches are well accepted but are yet to draw large volumes. Rallis is targeting to increase it’s share of non-pesticide business in total sales from current 31% in FY17 to 40% in FY18. Rallis is focusing on establishing its own seed brands in various segments of cotton, rice, maize, millet, wheat and mustard. The company expects the sales from seed division to grow by 20% in FY18.
Rallis is partnering with leading companies in the business segments of crop protection chemicals, Specialty Chemicals, Polymers and Intermediates. A capex of INR40-50 Crore has been allocated for the CRAMS facility at Dahej for which supplies will start soon.
Rallis is a debt free company with good return ratios and has been able to hold its presence in International business. We expect the company to achieve a CAGR growth of 13.75% in net sales by FY19 and a PBT growth of 9.8%. Besides, the strong cash flow of the company will help the company sustain growth. We have a TP of INR295 on the stock.
Thermax has invested in 3 additional manufacturing plants. The plant in Indonesia which became operational in July 2017 will be the manufacturing hub for the ASEAN region to meet the market demand. We can expect incremental growth in FY19 from these three Greenfield capacity expansion projects.
Management is expecting orders from sectors like textiles, Food processing, chemical, fertilizer, steel, Cement, sponge iron as the company witnessed inquiries for the orders in these segments. The company has also bid for the orders from Oil and gas industry as some traction being developed over there, owing to the Bharat VI requirement for the refineries expansion.
The upcoming cities planned across India needs integrated solutions and the company provides a range of products from Compact sewage e treatment and water recycling systems to absorption chillers. With the strong growth in its order book, order enquiries from various sectors, strong product profile, increasing export market and commissioning of new capacities in the coming period, we can expect a strong revenue visibility for the next 2-3 years.
Q. Apart from rising crude oil prices, what are the other macro risks for Indian markets in 2018?
A. Besides, rising crude oil prices, rising base metal and steel prices may impact margins of industrial companies as well. Inflation may be elevated due to base affect as well as increase in demand which may compel MPC to take hawkish stance on interest rates, which may dampen sentiments during the mid of FY2019. However, strong tailwinds arising out of consumption and growth may enable companies to pass on the increase in prices due to inflation.
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