Indian markets currently in pre-Budget rally might see a small correction which we believe would be a buying opportunity.
Abhinav Gupta, President - Capital Markets, Share India Securities, said he expects strong momentum to continue for equity market over FY19 due to revival in earnings. They are maintaining their year-end Nifty target at 12,500 in line with current multiples and pricing in the earning growth over the course of year, he told Moneycontrol's Sunil Shankar Matkar. Here's an excerpt:
Q) Indian markets started the year 2018 on a strong note with benchmark indices hitting a fresh record high in the first week of the calendar year 2018. Do you expect the momentum to continue? What is your year-end target for Nifty and why?
We expect strong momentum to continue for equity market over FY19 due to revival in earnings after teething problems of GST, low base of demonetisation, increasing focus of government on infrastructure development even at the cost of fiscal slippage and favourable global headwinds with favourable commodity prices. Increasing government spend will lead to higher purchasing power and we expect earnings to grow at around 17-18 percent over next year. We maintain our year end Nifty target at 12,500 in line with current multiples and pricing in the earning growth over the course of year. Indian markets currently in pre-Budget rally might see a small correction which we believe would be a buying opportunity.
Q) Do you expect Q3 as well as Q4 to be far better than Q2 earnings? Will India Inc. delivers double-digit earnings growth in FY19?
We believe both Q3 and Q4 will surprise on the upside and circumvent market apprehensions regarding earnings multiples. We believe earnings growth will outperform not only because of low base of demonetization in consumer related sector but a major portion of incremental growth would be through commodity based companies with upside risk as government pursues its infrastructure development agenda. Also, we believe government will continue to work for farmer welfare and will choose prudent way of increasing opportunities through food processing, animal husbandry etc rather than loan waiver. India Inc. we expect will deliver earning growth in high teens in the next two quarters.
Q) Do you expect NPA resolution to end by FY19? Will the PSU bank recapitalisation help the economy grow from FY19?
NPA resolution we believe will go through entire FY19 and might even extend given long standing of the problem and procedural delays with inclusion of multiple agencies. The government resolve however has never been stronger to get over the NPA problem and kick start the economy. PSU bank recapitalization will certainly help the economy grow given that banks with strong track record and execution capabilities are provided with growth capital. PSU recapitalization would help government infrastructure push in immediate term and in long term should help private capex once capacity utilization levels are above 80%.
Q) The much-awaited full-fledged Union Budget (of Modi government before general elections 2019) will be presented on February 1. What are your key expectations? What are the key sectors or themes that are likely to benefit the most from the Budget 2018?
That this budget is an significant goes without saying. Budget is being presented in backdrop of possible fiscal slippage, recapitalisation plan for PSU's in progress, after-effects of GST implementation, tightening liquidity globally, rising crude prices and most importantly general elections next year. We expect central government to walk a fine line keeping in mind long term prudence and near term appeasement of different voter class. Government in this budget will continue with its focus on rural income growth, infrastructure development and incentivising private capex. Food processing industry, EPC contractors and companies with strong rural footprint will be the biggest beneficiaries.
Q) Midcaps rallied more than 2 percent in the first week of 2018, outperforming benchmark indices. Do you expect that momentum to continue in the current year?
The recent surge in midcaps is led by global liquidity and expectations of improving fundamentals. Going forward we believe stocks in position to gain from higher disposable income, better rural network and execution capabilities will continue their upsurge. Commodity stocks will also perform well albeit growth would be limited due to tightening liquidity globally and lower demand from China. Mid-cap as a whole however we believe will out-perform headline index over the course of next year on back of higher earnings growth.
Q) As the inflation is moving northward and global central banks are likely to raise rates going ahead, do you expect RBI to follow them?
RBI we believe will be in wait and watch mode as far as raising rates are concerned. RBI would look to raise rates only if inflation crosses 6%-7% which is unlikely even with fiscal slippage. Infrastructure push might increase disposable income but its effect on inflation would be limited as it will have multiplier effect in economy and delayed response to inflation. Globally, reserve banks are coming out of long haul of easy liquidity, RBI on the other hand has maintained tight monetary policy to keep inflation in check. The upside risk to inflation is from higher commodity prices especially oil but market we expect will respond to inflation projections rather than headline inflation.
Q) Do you expect the Brent crude oil futures to cross USD 70-80 a barrel in the current year? How important is it from macro-economy perspective?
We believe crude will gain strength from current levels and rise further over next year. We set our year-end target on crude at USD 77 a barrel. The additional burden due to rising crude prices will cast a shadow over fiscal status - most of it however we believe has already been priced in by the market. India has smartly moved to change its energy mixture towards gas and renewables which would mitigate some of the higher crude price risk. Also, higher crude price will enable fresh round of public/private capex especially in upstream and gas transportation segment.
Q) What are your five best multibaggers for next 2-3 years or five best picks that can double the money in 2-3 years?
Our best multibaggers for 2-3 year perspective are:
MOIL (CMP Rs 255)
Strong demand uptick due to higher domestic steel production, higher realization with rate revision effective 1-Jan, possible avenues of demand from disruption in automotive segment with EV drive are some of the factors that provide us conviction for MOIL in spite of it being a ~USD 1bn company with majority owned by government. Moil has maintained healthy return ratios, strong profitability, lean balance sheet and completed its mine expansion. All this makes MOIL our preferred pick.
Ganesha Ecosphere (CMP Rs 435)
Ganesha Ecosphere is uniquely positioned to benefit from increasing PET demand in country and focus on environment as it converts PET bottles/waste into yarn/fibre. Ganesha Ecosphere has completed its capacity expansion and will benefit from volume growth FY19 onwards. The realizations for its product will also increase as polyester prices are closely linked to that of oil. Additionally Ganesha enjoys strong sourcing network and unbeatable track record.
Rajoo Engineers (CMP Rs 50)
Rajoo Engineers supplies machinery for packaging products and is bound to gain with strong consumption demand and uptick in FMCG sales. Currently trading at higher multiples wrt trailing multiples we confident strong sales and higher profitability due to positioning in industry. Rajoo has maintained strong return ratios and will continue to do so.
Greaves Cotton (CMP Rs 147)
Greaves Cotton has tied up with Piaggo to supply BS VI diesel and alternative fuel engines. Policy embargo on CV's and environmental concerns from NGT make us confident on prospects of company. Greaves Cotton drive significant portion of its revenue from agri-equipment and construction equipment. This makes Company uniquely positioned to gain from all quarters of government policies. Strong return ratios make us confident on management's capabilities to deliver.
Flex Foods (CMP Rs 136)
Flex Foods is an associate company of Uflex and a leader in flexible packaging technology. Flex Foods cultivates and processes food products and supplies vacuum freeze dried, air-dried, frozen and an individually quick frozen (IQF) product range. It sources its raw materials through contract farming through a dedicated network of 500 farmers. Strong pedigree, good product range and low forward earning multiples make us confident of better outlook for stock.
Hindustan Oil Exploration (CMP Rs 139)First O&G company in private sector with professional board, debt free balance sheet and proven development/operating experience puts this company in sweet spot with rising crude prices and gas demand in India. Company is planning to ramp up production capacity, raise capital for inorganic growth and acquire additional acreage. Open Acreage Licensing Program & Discovered Small Field (DSF) bid round 2 announced by the Government present excellent opportunities to grow the portfolio.