Narnolia Securities places its Nifty target for March 2019 at 11,524. Although in the short term, the 50-stock index could trade in the range of 10,000-10,600, Shailendra Kumar, Chief Investment Officer at Narnolia Securities told Moneycontrol's Sunil Shankar Matkar. Edited excerpt:
The market has been gradually moving upwards after recent sharp correction. Do you think it could continue to move northward or there could be more downside in the short term? What is your March 2019 target for the Nifty and how much returns do you expect in the next 12 months?
Both the sharp fall in Feb-March and then this recent pullback is closely related to how bond yield has moved. When 10-year bond yield rose above 7.4 percent and started inching towards traditional psychological level of high interest rate of 10 percent, the sell off began in Indian equities. Surely, the fall was aggravated due to disappointment from budget, rising rates in US (inching closer to its psychological level of 3 percent) and trade war lately. But Nifty is showing strength again as rates have cooled off. 10-Year bond yield has come down to 7.2 percent after making high of 7.78 percent on 6th March. Interestingly while on margin, macro on external front has deteriorated recently but Rupee has behaved strong. 2017 was an exceptional year in terms of rising equity market across globe in a multiyear low volatility environment. In 2018 this has changed and markets will be showing less of trending regime and more of cyclical swings. For Nifty, our March 2019 target is levels of 11,524. Though, in very short term we expect Nifty to trade in the range of 10,000-10,600.
Do the earnings and economic growth expectations justify current market valuations?
Nifty from September 2013 to January 2018 saw a rally from 5,471 to 11,171. This rally of 104 percent was more due to change in price multiple than earning growth as PE changed from 14 times to 21.5 times. Presently, Nifty is trading at 19 times its FY19 EPS. In a scenario, where corporate earning is expected to grow at 15 percent compounded over next 3-5 years, this valuation is surely justified for investment. Though a 10 percent fall in the index from these levels cannot be denied as that will bring valuation close to 17 times one year forward earning. And in a bull market it is usual for market to trade between valuation multiple of 17 times to 22 times.
Earnings for Q4FY18 will kick off soon. What are your earnings expectation for Q4 and FY19?
For the forthcoming result season, we expect Nifty EPS to grow by 14 percent Y-o-Y. For FY19, we expect earnings to grow by 15 percent. We expect Nifty EPS for FY19 to be 553.
What is your opinion on the ongoing trade war? What are the biggest risks for India on the global front?
Surely this ongoing trade war influenced by domestic political concern of world leading economies is a point of concern. US and China together accounts for 41 percent world’s GDP. Any shrinkage in global trade surely would impact global growth rate. But we believe we have seen the peak of the rhetoric around the subject and exact implications of policy happening in US and China would be much watered down. For India, in an immediate sense it may affect few sectors like auto component.
Have political risks been fully priced in or will they continue to be a cause for concern? Do you think some market participants are just overemphasising on political uncertainties to create buying opportunities?
Market is surely not trading at a very low valuation that one can disregard factors like political uncertainty. Also we have couple of key state election this year and outcome of these elections would surely influence market as these will be an indication of all important general election next year. But, corporate earning over next 3-5 years is expected to be strong, so negative surprises if any should be used by Investors to accumulate equities.
Is there any possibility of rate cut from the RBI going ahead?
RBI recent credit policy was in –line with market expectation in terms of maintaining status quo on policy rates. Govt. has said that borrowing would be lower in 1HFY19, but it being pre-election year, fiscal slippage and higher borrowing could be expected in the second half of the financial year. But sharp reduction in inflation forecast for full financial year 2018-19 in the recent RBI policy hints that there would be a long pause in RBI policy rate and there would not be any rate raise this calendar year. At the same time we do not expect any rate cut as there remain three key uncertainties - fiscal deficit in FY19, inflation particularly food in second half and pace of normalization of US monetary policy.
Banking sector has been in a focus amid multiple governance issues - PNB banking fraud, NPA, ICICI Bank-Videocon case or Axis Bank’s Shikha Sharma’s term extension issue. What is your view on these issues? Is it a good time to invest in PSU or private banks?
Despite the accelerated noise around NPA issue, we firmly believe that we are close to the end of this NPA saga. Total advances by PSU bank are Rs 54.69 Lakh Crores. GNPA is about 15 percent and NNPA is 9 percent. Out of the 5.0 Lakh crores NPA, 4.0 Lakh Crores is from just 40 accounts which are already in various resolution stages in NCLT.
Also standard re-structure is another 7 percent-8 percent and if 70 percent of it will go to NCLT as per recent RBI directives then approximately 5.5 percent more will be added to NNPA. So, total NPA will swell to 14.5 percent.
This would require further provisioning requirement of about Rs 1.80 Lakh Crores. But the average run rate of provisioning over last 8 quarters had already been Rs 50,000 crore. So in FY19, Indian banking sector at least in terms of NPA will surely come out in a better shape.
What are the 5 stocks for FY19 that you think could give handsome returns?
Some of the stocks that our research team has recently recommended are: ICICI Prudential Life, Quess Corp, M&M, Capacite Infraprojects and Equitas Holdings.
ICICI Prudential Life Insurance | Rating - Buy | Target - Rs 520 | Return - 31%
ICICI Pru Life Insurance is well placed to capitalize on India’s low insurance penetration. India currently accounts for less than 1.5 per cent of the world’s total insurance premiums and about 2 per cent of the world’s life insurance premiums despite being the second most populous nation. This throws huge opportunity for the company for growth for long term. Over The period of 2012 to 3Q2018, ICICI Pru has gained significant market share from 6 percent to 13.1 percent currently.
Strong premium growth, improving margin profile and consistent improvement in operating parameters suggest financial growth for future. Annualized Premium Equivalent has grown by 28 percent for Fy17. Company’s Value of New Business (VNB) has grown at CAGR of 56 percent during FY2015-2018 period; for 9MFy18, VNB grew by 82.2 percent to Rs 7.67bn. Self funded business – no capital calls since FY 2009.
With strong solvency ratio at 252 percent and less capital requirement due to product mix, well positioned to take advantage of growth. The 13th month persistency ratio is high at 86.7 percent and also 49th month persistency ratio is high at 61.8 percent for 8MFY18.
Market Cap to Embedded value for ICICI Pru is 2.3 times which suggest comfortable valuations. Our target for the stock is Rs 520.
Quess Corp | Rating - Buy | Target -Rs 1,200 | Return - 15%
While manpower outsourcing is a mature business in the developed world, such companies are still in their early phase of growth in India. Quess has created a formidable platform in the large business services space. Many businesses in India have been deciding that they can be more efficient, effective, and competitive if they buy certain services on the outside that they have hitherto taken care of internally.
Management is confident of 50 percent+ YoY growth for the foreseeable future: 20 percent organic and 30 percent from acquisitions. Directionally, EBITDA margin of 8 percent is the objective. Our immediate price target is Rs 1200.
Mahindra & Mahindra | Rating - Buy | Target - Rs 960 | Return - 22%
M&M is one of the top bets for rural market recovery. Impetus on doubling of farm income over next 5 years will boost domestic tractor business of M&M. M&M's farm machinery products revenue to total revenue rose is expected to jump from 37 percent in FY17 to 50 percent by FY19. Moreover, Margins in tractor segment is higher at ~17 percent against 4 percent in Auto segment. Our immediate price target for M&M is Rs 960.
Capacite Infraprojects | Rating - Buy | Target - Rs 400 | Return - 20%
It is EPC Company with mainly focus on construction of residential and commercial Buildings. Company’s current order book is Rs.5240 Cr, i.e 4.17x of TTM revenue. The company’s marquee client base like the Lodha Group, The Wadhwa Group, Godrej Properties Ltd, Transcon Developers Pvt Ltd and Ahuja Const etc assures consistent order book and improved revenue visibility.
We are confident about 20 percent CAGR revenue growth over FY17-20E coupled with improving operating margin. The company has efficient Business Model- Subcontracting of real estate- Residential projects which ensures lesser volatility in terms of QoQ Sales. The company has stable Margins and better managed working capital requirements. Our near term price target for the stock is Rs 400.
Equitas Holdings | Rating - Buy | Target - Rs 191 | Return - 23%
Equitas is all set to grow its book after restructuring of its business model. Diversification of assets and healthy growth in deposits base with 33 percent of CASA will provide stable NIM going ahead. Earning is likely to improve with decline in C/I Ratio.
Healthy capitalization (Tier I at 29 percent) will support 25 percent AUM growth going ahead. We like strong execution capability of management’s strategy. Our immediate price target for Equitas is Rs 191.