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'Nifty trading at premium valuation of 19x; HDFC Bank our preferred pick'

Any negative outcome from elections and continued slowdown in domestic and global economic growth can lead rupee to go over 70/$

April 15, 2019 / 01:02 PM IST
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On a one-year forward basis, Nifty is trading at a premium of 19x, a similar trend with skewed nature may prevail, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: In the backdrop of a looming global recession and a dovish commentary from the US Fed and ECB, should investors be worried?

A: The recession is the key risk being contemplated in the global market today. Global bond yield and oil price are showing a slowdown in the world economy.

The financial market is turning cautious overviewing such data, which the world market had not bared in the last 10 years. Rather than a deep recession, it seems to be at the cusp of a slowdown, which is well-accepted and measured by the world central banks.


This is supported by a reduction in interest rate and increasing liquidity. This is unlikely to be a dire state of affair for an emerging market like India that is likely to bounce with economic activities post FY19.

Q: Where do you see Nifty and Sensex in 12 months?

A: Forecasting main indexes have been tricky in the last 2-3 years. It has not shown the true trend of the broad market, rather than showcased a skewed picture led by a set of blue-chip stocks.

We started this year with a one-year target of 11,750 for Nifty50, which has marginally increased to 12,000 currently. This is despite a downgrade in earnings growth after the mixed result of Q3FY19.

The increase in target deflects the increase in valuation from 16.5x to 17x due to improvement in FY20 outlook.

The Nifty EPS for FY19 is expected at Rs 523 and Rs 615 for FY20. On a one-year forward basis, Nifty is trading a premium valuation of 19x, a similar trend with skewed nature may prevail.

Q: Which theme is looking more promising: largecaps or mid and small-caps?

A: FY20 is believed to be the year for mid and smallcaps. This space has managed the previous period of slowdown in business well despite tight liquidity and SEBI norms that impacted their valuation and growth.

After this underperformance, valuation has turned attractive being below the averages while outlook has improved.

Instances like stability in the domestic economy, possible gain from last reforms, post-election normalisation, reduction in domestic interest rate, pick-up in credit growth and reduction in global bond yield leading to higher inflows from foreign investors are likely to deeply benefit India, in which mid and smallcaps will outperform.

Q: What is your view on the currency for the next 6-12 months?

A: Recently, the rupee has appreciated by about 7 percent from the all-time low in October 2018, led by improvement in capital flows given dovish global central bank policies, RBI’s currency swap and expectations of a stable government.

Additionally, stable oil prices and fall in global bond yields were also supportive. In the near-term, given benign CPI inflation and expectation of a rate cut by RBI, the rupee is expected to gain some strength.

However, any negative outcome from elections and continued slowdown in domestic and global economic growth will lead rupee to retest above 70/$.

Q: Which sectors are likely to remain in limelight in FY20 in the backdrop of the general election? 

A: We are more positive on domestic-oriented businesses. In terms of sectors, we are positive on banks, cement, infra, chemicals, and consumption.

We are positive on banks because of normalisation in the NPA issue, capital infusion, the start of credit growth and reduction in the interest rate cycle in the coming year.

Cement and infrastructure sector will be in focus because of capital expenditure post-election, reduction in the cost of operation and funding and attractive valuation.

Chemical sector is looking attractive due to disruption in China generating opportunity for Indian exports while consumption as a long-ending story for India given the aspirational urban and rural market.

Having said that, valuation is not attractive across the consumption sector. Being stock specific will be the key to make money above the market.

Q: What are the factors that are likely to impact markets in FY20?

A: The global factors that can impact negatively are recession, delay in US-China deal, structural issue in EU and after effects of Brexit.

The negative factors in India can be a hung parliament and the NPA issue impacting private spending.

Q: How is FY20 likely to pan out for investors and markets at large?

A: We expect FY20 to be better than FY19 where mid & smallcaps are likely to outperform, supported by revamp in business and improved liquidity from FIIs and DIIs. India has been at a premium valuation for a long time which is likely to be maintained supported by higher inflows from FIIs and reduction in cost of equity, the fastest & largest growing economy in the world.

Volatility will emerge in-between-the finalization of US-China deal and election outcome since this will define the final effect on FY20.

Q) Top five value stocks which investors can look at for FY20?

A) Here is a list of top five stocks which investors can look at for FY20:

HDFC Bank:

In Q3FY19, loan growth momentum continued to remain strong (up 24 percent YoY) driven by 24 percent YoY growth in retail and 23 percent YoY growth in non-retail loans.

The asset quality remains stable with GNPA at 1.4 percent and NNPA at 0.4 percent. We expect NII/PAT to grow at a CAGR of 19/21 percent over FY18-21E on the back of 20 percent growth in loans coupled with improving operating efficiency. We value the bank at 3.6x FY21E P/ABV and maintain BUY rating.

PNC Infratech:

The order book remains robust at Rs 12,478 crore which is at 4.5x TTM revenue. Robust order book provides improved visibility in the coming years.

Currently, PNC has seven HAM projects of which four projects are under execution. Execution is likely to be smooth going forward as construction for major projects has started with an average of 85 percent land availability.

The benefit of higher execution and operational efficiency will stimulate earnings to grow at a CAGR of 27 percent over FY18-21E. Going forward, the company will take a conservative approach on bidding and looking only for EPC projects given the challenges in getting financial closure and liquidity crunch.

Mold-Tek Packaging:

Mold-Tek Packaging Ltd (MTEP), one of the leading suppliers of high-quality packaging for paints, lubricants, food and FMCG. MTEP’s revenue grew by 12 percent CAGR whereas PAT grew by a whopping 41 percent CAGR over FY13-FY18.

Strong profitability growth was led by margin expansion on account of the increasing share of in-mold volumes. We expect earnings to grow at 22 percent CAGR over FY19E-21E led by an increasing share of IML in revenue mix, exponential growth in F&F segment and incremental volumes from capacity addition for existing clients.

Dalmia Bharat:

Dalmia Bharat Ltd, the fourth largest cement company has recently completed the restructuring and the resultant merged entity ‘Odisha Cements Ltd’ will be renamed as ‘Dalmia Bharat Ltd’.

The muted realisation and surge in costs have been a drag for the cement companies last year. Now, fuel prices have started softening and realisation has also started to improve in various regions which will improve margins.

Additionally, new acquisition (Kalyanpur cement-1.1MT-started production) and the new capacity (~7.8MT in East with a capex of ~Rs 3,700 crore  likely to be completed by FY21) will support volume growth.

Apex Frozen Foods:

Apex has almost doubled its processing capacity during FY14-18 to 15,240MT and is currently adding 20,000MT, expecting to complete by Q4FY19.

Out of the total new capacity, 5,000MT is for value added-products, which will improve realization and margin. Recent backward integration in farming (600acres) and hatchery (1bn to 1.4bn seeds) will ensure supply and cost saving.

Shrimp realisation which witnessed a declining trend since Q3FY18 due to extended winter in the US coupled with strong supply has now stabilised.

While PAT is expected to de-grow in FY19, 11 percent CAGR is expected over FY18-20E, but excluding the high growth period of FY18, earnings growth is strong at 44 percent CAGR.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Apr 15, 2019 01:02 pm

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