Kshitij Anand Moneycontrol News
Vinod Nair, Head of Research at Geojit Financial Services, said the focus will continue on strong market leaders with stable and sustainable businesses. “Defensive sectors like IT, FMCG, pharma and consumption-oriented companies appear attractive.”
Edited excerpts
Q) What is the way forward for markets, some consolidation or a one- way rally? A) We are still within a long term bull rally. This consolidation phase can continue till domestic earnings growth returns, political fears settle, global bond yield normalise and risk-off trend reverses.
Q) Market is at a record high but most investors are not happy because the value of their portfolio are not reflecting the same sentiment. What should investors do now: wait patiently or churn your portfolio? A) We have been asking retail investors to shift their equity exposure from mid- and smallcaps to largecaps. Some midcaps have become attractive after this correction and can be considered for the long-term.
Q) Which stocks will drive next 1,000 points rally on the index? A) We feel the focus will continue on strong leaders with stable and sustainable businesses in defensives: IT, FMCG, pharma and consumption-oriented companies like autos, electronics and aviation.
Q) Any sectors which could be a dark horse in 2018? A) Given the muted pharma outlook, the earnings forecast is subpar. The low valuation may not have been completely factored in, providing volatility in the near term, but this could lead to long term investment opportunities for those using the systematic investment route.
A large portion of the loss in revenue is accruing from regulated markets, especially the US. This is largely factored in and earnings growth will take some time to come back.
The Trump administration had come out with a blueprint of their pharma policy. As of now, it doesn’t look very negative for Indian companies, though there is a lack of clarity on the implementation side. Increasing drug approvals from the US Food and Drug Administration is keeping sentiment positive.
On the domestic front, the government’s push to provide quality healthcare is positive given the rising demand. We remain bullish on pharma stocks for the long-term with expectations of a recovery from the second half of FY19.
Q) Any stocks that could be potential multibaggers in the next 2-3 years?A) InterGlobe Aviation: The company is one of the most efficient low-cost carriers (LCC) with a market share of 40 percent in the Indian aviation sector. IndiGo’s passenger traffic grew at a compounded annual growth rate of 31 percent versus industry growth of 15 percent CAGR over FY14-18. Going forward, expanding market presence through fleet addition and firming up of its regional connectivity plans augur well.
IndiGo’s fleet comprise 15 percent more fuel efficient models which will cushion its margin 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 the counter as it delivered a return on equity of 40 percent, efficient operations and strong balance sheet.
KNR Constructions: We have a positive view on KNR Construction for the long term due to its strong fundamentals and order book of Rs 2,327 crore, which is 1.2 times FY18 revenue. Financial closure of 5 hybrid annuity projects of Rs 5,611 crore is under progress, which will provide traction in the order book going forward.
The stock has been correcting in recent times due to weak sentiment in midcap stocks and concern on execution ahead of the upcoming general election in 2019. Better execution capability, improving operational efficiency and government’s strong focus on developing road projects will keep the outlook positive.
Q) The whole rally in markets has been led by a handful of 8-10 stocks. At the same time, the rest of the market is a bit shaky. Do you see the momentum continuing? A) After a supernormal performance since 2014, the market is taking a breather, acknowledging the facts like changes in equity scenario, led by an increase in the cost of funds and high valuation. This narrowness will continue till the risk-taking ability improves. Large caps, consumption and defensive sectors are likely to outperform the rest of the market.
Q) How do you see escalating trade wars concerns turning out for Indian markets? A) A trade war is unlikely to impact the Indian economy directly whereas it could have a disruptive change on global trade, depending on the ongoing dialogue. This could have come pros and cons on the Indian market over the medium term. Globally, it can have an impact on the risk-taking ability of investors.
Q) What are the key risk which the Indian market could face in the next 6-12 months? A) The four important factors are: 1) Earnings growth should resume; 2) Volatility in oil prices should reduce; 3) The risk of changes in domestic political scene should settle; and 4) Foreign institutional investors should return to the Indian market.
As a remedy to all these points, Q1 FY19 is providing hopes of earnings growth, oil prices have reduced from $80 per barrel to $72/bbl, many parts of the politic risk have been factored in the market, while stoppage of a fund reversal from emerging to developed markets will depend on global bond yields.
Q) Infosys and Tata Consultancy Services have announced their results. What is your outlook on the sector and which one is a preferred buy? A) TCS delivered solid performance in Q1 FY19 with constant currency (CC) revenue growth of 4.1 percent quarter-on-quarter anchored by a recovery in the US banking and financial space and broad-based growth in other verticals.
Infosys delivered largely in-line performance in Q1 FY19 with consolidated revenue growth of 2.3 percent QoQ in constant currency terms due to muted growth from the banking, financial services and insurance (BFSI) space.
This sector is on a recovery path owing to higher digital revenue contribution and large deals wins from banking and the financial segment, which constitutes 60 percent of overall revenue, against a sluggish growth for the last 8 quarters. The valuation gaps between TCS and Infosys has widened due to higher revenue visibility of double-digit growth for TCS.
TCS will maintain its premium valuation given resilient management commentary on US BFS and retail demand outlook, with improving trajectory of large deal wins and scale-up of digital competencies. We are factoring in 12 percent revenue CAGR over FY18-20e.
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