We do believe the Indian markets are currently overvalued especially in light of elusive earnings growth.
The risk-to-reward trade-off is currently not in favor of further equity investments and we suggest investors wait for better levels to re-enter the markets, Nitin Bhasin, Head of Research, Ambit Capital, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) What are your views on the market which hit 10,000 peaks and has delivered about 22 percent return so far in the year 2017? How is the second half of the year expected to pan out? Do you think it is time for investors to book some profits and buy again on dips?
A) We do believe the Indian markets are currently overvalued especially in light of elusive earnings growth. On the back of stretched valuations and limited investable opportunities, we increased allocation to cash (now at 20% portfolio weight) in our recent G&C portfolio as well.
With GST led disruption likely to continue affecting earnings over the next couple of quarters we have no reason to believe that earnings growth will pan out anywhere close to high double digit consensus expectations.
As a result, risk reward trade-off is currently not in favor of further equity investments and we suggest investors wait for better levels to re-enter the markets.
Q) If somebody comes with you with a monthly investment of Rs15,000-20,000 to realise his crorepati dream. Can he realise his dream by investing in direct equities or it is better to go via MF route? What is minimum capital required to start trading?
A) Direct equities can be difficult as it requires a lot of discipline, research, and concentrated bets. Someone with monthly investments of Rs15-20K but with an investment time horizon of 15-20 years should choose a basket of good companies like the Coffee Can Portfolio Approach highlighted by our team or MF schemes focusing on high-quality companies run by good capital allocators.
Q) Gush of liquidity has already pushed markets across the globe to fresh highs. What are your views on global markets and experts say that a big correction in India market can only be triggered if there is a global trigger? What are your views?
A) The US 10 year yields have seen their sharp rise post Trump election reverse over the course of CY2017. While the US Fed has signaled its intention of unwinding the QE program and raising rates, it remains to be seen if the US growth can continue on the steady path of the last few quarters – allowing the Fed to raise rates without jeopardizing growth.
A sharp increase in rates can cause short term jitters globally as the cost of money goes up. The rise in Indian markets, however, has largely been driven by retail inflows into the Mutual funds.
Certain sectors, in particular, have gained the favor of this excess liquidity which has led to their valuations reaching stratospheric levels.
While a global event (geopolitical or otherwise) can certainly be a potential party spoiler, we think that the Indian markets face a bigger risk from lack of underlying earnings growth in line with overblown market expectations.
Q) How are you seeing ITC stocks after a recent increase in cess by the government? Do you think the smart money will move out of ITC to other stocks like HUL, Britannia etc?
A) We acknowledge that recent hike in Cess was unexpected and a negative surprise. However, we believe that all that it has done is to make FY18 a normal year (with 13% tax hike, in line with last 5-year average) vs being an exceptionally good year with close to 0% tax hikes.
We have maintained our view that FY18 would have been a one-off good year and structurally ITC would remain a 12-13% EPS CAGR story led by 0-2% volume growth, 5-6% realization growth and some margin gains and profitability turn around in FMCG providing support.
We see no reason for the change in this thesis and expect 10% tax hikes and similar price hikes to continue going forward as well for ITC which should lead to marginally positive volume growth trajectory for Cigarettes.
ITC has taken 7-8 percent price hikes recently with lower end brands witnessing higher hikes and the premium end has seen lower hikes (as this end has ad valorem taxation).
We believe ITC’s price hike is marginally ahead of our estimates and steep hikes at the lower end are equal to risk to volume growth. But, it would also mean higher than expected margins.
Hence, we maintain our earnings estimate. We admit that ITC’s 12-13% EPS CAGR over FY17-20E pales in comparison with FMCG sector’s expected EPS CAGR of 16-17% but so does its valuation which at 26xFY19E is at ~30% discount to the sector.
Disclaimer: Ambit and/or its associates do not have any interest in ITC.
Q) Any particular instance you recall when you were interacting with your clients which were funny or made you think twice about the problem or taught you something?A) Finding a mispriced stock is not enough; how much should that account in your portfolio is the key thing