India is in the midst of a secular bull run and we see markets rising towards 10,500 by the end of 2017, and for 2018, our target is placed at 11,500, Sahil Kapoor, Chief Market Strategist, Edelweiss Broking, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Where do you see markets headed in the rest of 2017? We are unlikely to see a repeat performance of H1 but do you think we will be able to hold 10K on Nifty and 32K on Sensex by December?
India is in midst of a secular bull run. We see markets rising towards 10,500 by the end of 2017. Our 2018 target is placed at 11,500. Interestingly, markets across the world show low volatility and low draw down uptrends time and again.
A case in point in the S&P 500 run from February 91 to July 98 where in nearly 7 years the S&P 500 a drawdown of more than 6 percent only 6 times and spread over just 4 months.
It appears that Indian markets are also witnessing a low volatility and low drawdown uptrend where maximum corrections haven’t been more than 5 percent this year. In that sense, 10,000 should be able to hold for this year.
What are your views on Infosys and the IT sector? The bad news doesn't seem to end for India’s second largest software exporter? What is your stance and do you see it getting murkier?
IT sector is facing challenges as the way global clients consume IT services changed significantly and traditional services are experiencing pricing pressure. This scenario is expected to continue in the medium term and hence offshore and traditional service dependent IT companies are expected to face headwinds.
What are your views on Infosys?
Infosys is no different from other big IT companies. Erstwhile CEO was trying to change things. But, they will face bigger challenges as leadership issue in a company in the middle of transformation is dangerous.
The bad news doesn't seem to end for India’s second largest software exporter? What is your stance and do you see it getting murkier?
Internal challenges in a period when the entire industry is facing headwinds will only aggravate the trouble.
There is lot of news brewing around the pharma sector? What is your call on the sector and what should investors do if they are holding a substantial amount of their portfolio in funds or stocks?
The pharma sector is trading at 20.6x rolling 1-year forward earnings/16 percent premium to Nifty versus 26.2x/42% a year ago.
FY18 is likely to be a disappointing year, with the rupee appreciation being an additional headwind along with business woes in the US as well as India.
We believe profitability of the generic business is collapsing and companies are trying to either move up the value curve or shifting to other branded markets.
During this process, there will be a pain but we believe a number of players have the ability and balance sheet strength to navigate this change. At this juncture, it makes sense to wait for more clarity before putting fresh investments in this sector.
Investors holding this sector should seek opportunities in other sectors which offer better promise and earnings visibility unless the holding periods are more than 3 years.
The small and midcap stocks which saw a knee-jerk reaction earlier in the month of August have bounced back sharply. Do you see a bubble in the small and midcap space?
A large number of mid and small cap stocks have seen stellar moves. But, sustainable stock price appreciation has happened only for companies which have delivered profit growth and earnings visibility.
Over the last 3 years, we analysed a basket of 1,600 stocks and found market cap gains of 55 percent on average for stocks which have seen profitability growth of more than 50 percent over this period.
This is in comparison to stocks which have seen an erosion of 20 percent in the cumulative market cap where profits have fallen more than 50 percent on an average.
We see some overheated pockets and some good opportunities but currently, bubble like characteristics are not visible.
What is your mantra which you give to your clients to achieve their dream of becoming a crorepati?
Investing in companies which can deliver sustainable growth in profits and has moat which is hard to breach over a period can deliver excellent returns.
Turning your invested capital into a sizeable portfolio takes years of consistence performance and avoidance of ideas which can go sour. Investors should adopt differentiated research while selecting investments and should avoid flavor of the month or quick rich ideas to avoid losses.
The power of compounding invested capital through careful selection of investments is the mantra.
Any top five stocks which you think have to the potential to become multibaggers in the next 2-3 years and why?
Ratnamani Metals & Tubes Ltd (RMTL):
RMTL currently has an ongoing investment of Rs 350 crore with an objective to enhance its leadership in the stainless steel (SS) tubes/pipes segment.
This new capacity will enable RMTL to capture the significant opportunity emerging from the government’s policy of encouraging imports substitution and preferring domestic suppliers over imports in PSU contracts particularly in sectors such as oil and gas, defence, aerospace, nuclear energy — an opportunity valued at least at Rs 1000-1500 crore beyond its present market of Rs 1500 crore pa.
We expect SS tubes volumes to grow by 22.6 percent CAGR between FY17-20E with higher blended realizations and margins. The carbon steel pipes segment has a strong opening order book of Rs 420 crore, a majority sourced from the water and gas sectors.
We expect RMTL’s carbon steel segment to grow volumes at 8.8 percent CAGR over FY17-20E. Higher operating leverage and improving blended realization is expected to take FY20E EBIDTA margin to 20 percent from the current 18.2 percent.
In the past decade, RMTL has consistently posted RoCE of 20 percent, which we believe can be grown to 23 percent in FY20E as the current demand leads to improved realizations.
Dilip Buildcon Limited
Indian road sector is expected to experience immense growth backed by an increase in spend and improved policies by the government both at central and state levels.
Dilip Buildcon (DBL) is the largest road construction company in India with Rs 20,000 crore order book and Rs 5,100 crore revenue and is expected to be a major beneficiary of thrust in road and construction segment.
Strong and in-house execution, an end-to-end capabilities, and before time delivery aid DBL to earn highest EBIRDA margin and one of the highest RoCE in the road construction space.
Limited investment and the improved working capital cycle will reduce the stress on the balance sheet and hence return on invested capital will improve going forward.
GIC Housing Finance (GICHFL)
GICHFL is a well-capitalised retail HFC with over 97 percent of loans financed to individuals and up to Rs15 lakh loans constituting 50 percent of the loan book.
While housing loans account for 83 percent of loan book, balance are LAP. The company prefers to finance the salaried class, which forms 77 percent of the loan book.
Humungous untapped market and policy push significantly burnish prospects. Hence, GICHFL has raised its loan growth target significantly — to Rs 160 billion by March 2019 from Rs 79.1 billion in March 2016, implying 26 percent CAGR over FY16-19 and 29.3 percent CAGR over Q3FY17-FY19.
Dip in high-cost borrowings and rising share of high-yield loans to boost NIM. The share of high-cost borrowing was 75 percent in FY15, which fell to 67 percent in FY16 versus the industry average of 28 percent.
The management has guided to cut it to ≤50 percent. We estimate GICHFL’s earnings to jump significantly over FY16-19 which will expand RoA and RoAE.
The earning surge is expected on account of a) target to double loan book to Rs 160 billion over FY16-19; b) plan to increase the share of LAP from ~17 percent to 20 percent, and c) goal to steadily cut borrowings from commercial banks to ≤50 percent from 67 percent in FY16.
We have projected loan book CAGR of 25 percent over FY16-19, while NII, operating profit, and PAT are estimated to grow 24 percent, 26 percent and 27 percent, respectively
Trident, which commenced operations as a yarn player, has now shifted to the higher margin home textile segment (71 percent of FY19E revenues vs 46 percent in FY16).
We envisage Trident’s EBITDA margin to increase due to the shift from a yarn manufacturer to the higher margin home textiles, improved performance from the paper division and increasing utilisation.
Utilization of terry towels and bed linen is expected to improve from 49 percent and 32 percent currently to 66 percent and 54 percent in FY19E, respectively resulting in operating leverage.
Trident will generate Rs 600 crore free cash flow every year over FY17-19, a part of which will be used to repay the debt which will boost PAT.
Higher utilisation will spur asset turnover and margin, which will result in RoE and RoCE expanding from 8 percent and 14 percent in FY16 to 16 percent and 22 percent in FY19E, respectively.
The stock trades at an inexpensive valuation of 8x FY19E P/E in spite of improving financials and a leadership position in home textiles and branded copier paper.
Asian Granito India (AGL) is the fourth largest tiles manufacturer in India, with ~33MSM capacity and accounts for ~8 percent of the organised tiles market.
It produces ceramic wall & floor tiles and digital, polished/glazed vitrified tiles- and is also engaged in marble and quartz manufacturing with an annual installed capacity of 1.3MSM.
The company has a wide range of tiles portfolio offering 1,200 plus designs across the Rs 30 to Rs 165 per sq ft price range. A vibrant product range, aggressively expanding distribution network, sustained capacity expansion and potential benefits of shift of market share to organised players are expected to aid AGL to outperform peers.
Expected growth FY17-19E - sales: 19 percent CAGR; EBITDA margin improvement: 180 bps; PAT: 46 percent CAGR.
Strong footprint on domestic and international platforms, the untapped potential for national consumption, greater emphasis on exports and enhancing partnerships via mergers and acquisitions.
Where are the FIIs going? FPI net outflow from equities at Rs 7,344 crore so far in August. What is causing this change in the sentiment?
On the whole FIIs have been net buyers of stocks this year to the tune of nearly Rs 45,000 crore. August is the second month after January which is witnessing outflows. However, we believe that it is only an aberration in what seems a continuous flow of FII funds into equities.
Event FDI flows have been robust clocking a growth of nearly 30 percent in Q1 FY18. We believe a large portion of FII flows are flowing towards the debt markets. Indian debt markets have seen flows of 1.25 lakh crores this year.
This is reflected in record levels of FX reserves and continues strength in the rupee. It seems foreign inflows are here to stay for now.
Were you satisfied with the June quarter results? If not, do you fear the recovery will take more time than what the market anticipates?
The June quarter results were a tad weaker than consensus estimates and our expectations. However, we believe that the current trend in markets is of expansion in multiples which is as per historical norms.
In most bull markets valuation, multiple expands first and then earrings catch up. Due to demonetization and GST, the earnings recovery has been delayed but we believe that H2Fy18 will be much brighter and earnings in FY18 may end with a growth of nearly 15 percent for Nifty.
What is your view on the banking sector especially PSUs as RBI chief has called for the recapitalization of banks? Do you think it is the dark horse which nobody is looking at?
None of the PSU banking stocks have hit a fresh record high even when markets have done it repeatedly for the last 7 months.
We believe that the shift of credit from PSU towards the private banks and NBFC is going to continue. So, it makes sense to use rallies in PSU banks only as trading opportunities given the current conditions.
Which sectors are likely to lead the next leg of the rally in the next 12 months – is it digital India, e-banking etc.
Low-cost housing led finance, building materials, road construction, textiles, and dairy are the sectors which should do well in the next 12 months.