Akash Jain is confident that economic recovery is on its way and that should help corporate earnings grow in double digits in FY19.
We expect investors to be stock specific and consider companies with good earnings visibility at a decent valuation. We are confident that in FY19 Nifty will touch a new high, Akash Jain, Vice President Equity (Research) at Ajcon Global Services said in an interview to Moneycontrol.com’s Sunil Shankar Matkar.
The market has been volatile after recent sharp correction. Do you think it could resume northward journey soon 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?
We believe that we are in a structural bull-run. Temporary hiccups which have caused the domestic bourses to slide have made it healthier. It was a much needed correction as liquidity was driving prices of stocks rather than fundamentals. Earnings growth, which was a drag in the first two quarters due to demonetisation and goods and services tax (GST) rollout, was promising in quarter ending December 2017. In addition, we believe the all the negatives have been priced although do not rule out intermediate corrections. We believe investors to be stock specific and consider companies with good earnings visibility at a decent valuation. We do not have a target for Nifty but are confident that in FY19 it would touch a new high.
Do the earnings and economic growth expectations justify current market valuations?
Yes we do believe that the current market valuations are justified after the recent correction owing to rising bond yields and crude oil prices, trade wars between global economic giants US and China, introduction of LTCG in Budget 2018, deterioration in market sentiments owing to PNB banking fraud. The valuations have become reasonable compared to levels what we were trading back in November 2017 and December 2017.
Earnings for Q4FY18 will kick off soon. What are your earnings expectation for Q4 and FY19?
Going ahead, we believe, Q4FY18 earnings season would be good. We are confident that economic recovery is on its way and that should help corporate earnings grow in double digits in FY19. Infrastructure, consumption sector would drive earnings growth. The recent hike in cement prices also reinforces our conviction that things have taken off in the ground level as well. We believe corporate earnings should witness a CAGR OF 15 percent over the next two years and that should make the current valuations cheap on forward earnings.
What is your opinion on the ongoing trade war? What are the biggest risks for India on the global front?
Indian capital markets are not secluded from the global markets. Hence we feel there would impact on Indian equities. Financial instability would be a result from intensification of the ongoing trade war and the unwinding of the easy monetary policy by developed nations. Higher tariffs can force the countries to devalue their currency to make their exports competitive which can have a negative effect. We believe that the ongoing trade war cannot go long as it would have serious repercussions in the respective economies. There has to be some amicable solution which would even out the worries of market participants.
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 overemphasizing on political uncertainties to create buying opportunities?
We believe the present government has done a decent job since it has come into power. The next 1.5 years would create some uncertainty on the elections front which would create volatility. It would all depend on the current government as to how they keep a fine balance to meet the demands of masses and the economy.
Is there any possibility of rate cut from the RBI going ahead?
We do not believe that RBI would raise interest rates as CPI has been under control and RBI has lowered the inflation outlook. However, if food inflation rises out of deficient monsoon, then possibility of interest rate hike might come true. It’s too premature to talk about RBI’s action in the next policy as it would depend on monsoons. However, the threat of inflationary pressures looms amid global trade acrimony and the climb in commodity prices and higher MSP fixed in Budget 2018. Brent crude is trading at USD 69.66 a barrel, sharply up from the 2016-17 average of USD 47.56 a barrel as tensions in the Middle East rise.
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?
We believe the current issues are very serious and put a bad name on India’s corporate governance in the Indian Banking system in front of global investors. We believe concrete measures would be taken by the regulator and the government in order to avoid such issues in the future.
We are of the view that the recent correction in PSUs is a good opportunity to invest in. However, we do not rule out further slippages and write offs in PSU banks. Recapitalisation and recovery measures would improve the bleak picture in the PSU banking space. However, PSU banks should perform on their own rather than depend on recapitalisation. Selective private banks would continue to do well. Our top pick in private banking space is HDFC Bank.
What are the 4 stocks for FY19 that you think could turn multibaggers?
Shalby is one of the leading multi-specialty chain of hospitals in India. Led by Dr Vikram Shah, an orthopaedic surgeon with more than 25 years of professional experience, the Company has grown from a single hospital to a chain of multi-specialty hospitals. At CMP, the stock is valued at a P/E of 37x on FY17 diluted EPS which is at a discount to peers in listed space like Apollo Hospitals (52x), Narayana Hrudalaya (70x) and Healthcare Global Enterprises (112x) with much lower OPMs and single digit return ratios.
With due consideration to factors like a) leadership in orthopaedics and strong capabilities in other specialties, b) integrated and scalable business model enhancing its patient reach, c) only player in the industry to grow 2000+ beds without any non-promoter equity funding. Growth funded entirely through internal accruals and debt recently, d) strong Q3FY18 performance witnessed, e) market leader in the procedure of joint replacement surgeries with a 15 percent market share of all such surgeries conducted by private corporate hospitals in India in 2016, according to the F&S Report, f) payback period best in class, g) best in class EBITDA levels - consistent EBITDA upwards of 20 percent against industry average of 12-15 percent, h) significant improvement in PAT going forward post repayment of debt, i) robust return on equity (ROE) of 28 percent as against single digit ROE of peers.
Capacite is a specialized player in construction of High rise and Super High rise buildings (comprises of 60 percent + in order book) predominantly operating in MMR, NCR, Bengaluru and other major cities where competition is limited. Introduction of RERA will benefit Capacite as requirement of timely completion of projects will increase demand for Capacite as it has strong track record of timely execution and quality. The company uses specialised formwork technologies, including Vertical Composite Panel system for columns; Horizontal Composite Panel system for slabs, Crane enabled Composite table formwork, Aluminium Panel Formwork and Automatic Climbing System Formwork. This modern technologies help reduce the construction cycle time of replicating floors in a highrise construction.
The Company has a large Order Book with marquee client base which comprises of Godrej Properties, Oberoi Realty, Kalpataru, Lodha, The Wadhwa group, Brookfield, Purvankara, Four Seasons etc. and repeat orders, ownership of state-of-the-art system formworks and other core assets, seeking a great number of lock and key projects including MEP, finishing and interior services which enjoy higher margins, strong financial performance as evident by its robust topline and PAT growth, favorable cash conversion cycle, strong ROE of 20 percent+,
Voltamp Transformers would be a key beneficiary of economic revival. The Company’s capacity utilisation significantly from 71 percent in FY16 to 78 percent in FY17 which enthuses in us the confidence that the sector will soon rebound.
The company is a market leader in the sub-220 KV transformer segment and is benefitting from a higher demand led by applications like solar power generation, etc. Voltamp’s capacity of 13000 MVA is close to 14 percent of the organised market.
The Company’s management quality is best in the Transformers space and is evident by the fact that it has huge cash reserves to Rs 300 crore, which is about 25 percent of its market capitalization which is significant in an industry which is suffering from excessive working capital and bloated balance sheets.
The Company has been able to maintain its growth momentum both in terms of volume and margins for consecutive years. Volatility in the Domestic as well as International market of principal raw materials had been a constant challenge for the Management to execute fixed price orders at budgeted cost and maintain the margin. The Company could avail some benefits out of falling material prices and better discipline in selecting orders along with scaling up volume help greatly to improve margin. The Company’s dependence on TRANSCOs (erstwhile SEBs) business has come down drastically.
We expect a strong improvement in earnings for FY19 and FY20. The Company is debt free and is available at attractive valuations.
We believe the market participants have not understood Reinsurance Business model and hence this Company at a discount of to IPO price of Rs 912. Let me tell you, it is the only listed company in reinsurance space. GIC is the largest reinsurance company in India in terms of gross premiums accepted in fiscal 2017, and they accounted for approximately 60 percent of the premiums ceded by Indian insurers to reinsurers during discal 2017. GIC is also an International Reinsurer that underwrote business from 161 countries as at June 30, 2017.
GIC ranked as the 12th Largest Global Reinsurer in 2016 and the 3rd Largest Asian Reinsurer in 2015, in terms of gross premiums accepted. Having more than 44 years of experience in, and commitment to, providing reinsurance products and services, GIC has become a trusted brand to their insurance and reinsurance customers in India and overseas.
Its net premium on a restated consolidated basis has grown at a CAGR of around 39 percent between FY15 to FY17 and PAT during the same period grew at a CAGR of around 4 percent. 98 percent of re – insurance business of GIC is General Insurance and general insurance penetration is 0.7 percent in India versus Asian peers average of 2.7 percent and global 3.7 percent.It has right of first refusal granted by the regulations – i.e every re insurance proposal is first looked by GIC and if rejected, is sent to other reinsurance players, solvency ratio of 1.83 versus 1.5 (Statutory requirement), 3-year CAGR of non-life gross reinsurance premium (i.e. FY14-FY17): 31.7 percent, combined ratio (underwriting profitability) is around 98 percent which is expected to go down in coming quarters, robust retrocession levels – net liability of only 10 percent of gross, robust investment book of USD 10.7 billion across fixed income and equity with Net Investment Yield (without unrealised gains) (FY17): 12.34 percent consistently generating ROE of 16 percent, higher per employee productivity as compared to global peers (GIC USD 0.78 million, Swiss Re: USD 0.04 million and Munich Re USD 0.06 million), one of the highest dividend payers to Government of India (FY17 dividend greater than Rs 1,000 crore).