Earnings of Nifty companies are expected to grow at a CAGR of around 20 percent between FY19 and FY21, and given the accelerated pace of earnings growth, Nifty could be around 12,300 by end-2019, Harendra Kumar - Managing Director, Institutional Equities at Elara Capital said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: After a volatile 2018, what do you expect from the market in 2019? What is your Nifty target?
A: Our analysis suggests that months preceding general elections witness higher than average levels of volatility. Add to that, the current global environment with overhangs around trade wars and Brexit, we expect heightened volatility environment to continue at least for the first half of 2019.
However, we also expect a sharp recovery in earnings over the next two fiscal years. We expect earnings of Nifty companies to grow at a CAGR of around 20 percent between FY19 and FY21. Given the accelerated pace of earnings growth, we expect Nifty to be around 12,300 by end 2019.
Q: Will domestic liquidity that backed the market in 2018 amid FII selling continue in 2019 or is there risk of it drying up?
A: On the domestic flow side, we have a situation wherein the discretionary flows into MFs are slowing down, but the more sticky SIP flows are continuing to be strong. Strong SIP flows is a positive signal to us because usually we find retail investors pull out money at times of market correction. This time, however, in spite of around 13 percent correction post the Aug'18 peak, retail investors have stuck to their SIPs. On the whole, we expect the financialisation trend to continue.
On the FII side, we expect flows to turn positive in 2019 for India and other EMs. With US Fed likely to take a pause in rate hike in 2019, and challenging growth environment in DMs, flows into EMs will increase.
Q: How do you look at India growth story (including GDP forecast) in 2019 in the context of a potential slowdown in the world’s largest economies - the US and China?
A: Incremental data points from key DMs and EMs - Japan, Germany, Brazil and South Africa apart from the US and China - are pointing towards a challenging environment for global growth over the next 12 months. While we do expect India to feel the impact of slowing global economy, we will be far more insulated compared to other export-oriented EMs.
Election years in India witness huge spending that support consumption. 2014 elections, as per estimates, saw spending to the tune of Rs 35,000 crore. Even conservatively adjusting for inflation, this figure could be in excess of Rs 45,000 crore in 2019. All that money go towards boosting consumption.
Q: After the underperformance in 2018, do you expect midcap and smallcap to outperform frontliners in 2019?
A: Midcaps and smallcaps have seen sharp correction in 2018 and several companies with solid fundamentals are available at much more reasonable valuations now. Given the overall robustness in earnings recovery, 2019 could well be a year of midcaps and smallcaps.
Q: Do you expect any kind of deep correction in the Indian market in 2019 and what are those major domestic & global risks?
A: Near-term risks to the markets are the political risks and risk of populist policies and consequent fiscal slippages. Markets like policy continuity and any indication to the contrary will be a negative, in our view.
Globally, continuing trade and geo-political tensions and the impact of Brexit will be the key risks.
Q: What are your earnings expectations for Q3FY19 after mixed performance in Q2 and do you see any chance of earnings downgrade, especially after favourable macros (like crude)?
A: As per our estimates, an earnings growth of 16 percent is required for industries other than financials to be in-line with their FY19 target. Earnings recovery in financials will be key and with increasing credit growth, we expect banks and financials to register a good Q3FY19. As such incremental downgrades will be minimal in our view.
Q: What are you top five bets among largecaps?
1. Reliance Industries - The company will lead the market rally as the street starts to value the retail and telecom divisions in line with global peers.
2. ICICI Bank - We expect a significant jump in spread due to private banks regaining loan pricing power. The spread expansion can continue for the next 2-3 quarters. The NBFC situation could take time to stabilize while PSB (barring SBI) still face issues, such as poor core capital and M&A overhang which would further help private banks
3. Apollo Hospitals - with major capex behind, bed utilisations likely to improve, there are positive triggers
4. Aurobindo Pharma - Strong injectable sales, scale-up in Natrol business and new launches should derive healthy US sales growth. Further, clearance of Sandoz acquisition will aid strong double digit growth. Valuations are reasonable at current levels
5. Ambuja Cement - Strong utilisation levels and reduction in raw material and freight costs due to crude price correction are all margin accretive.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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