We are cautiously optimistic on markets and prefer companies with strong earnings visibility, good pricing power and long-term structural triggers, Gautam Duggad, Head of Research, MOSL, said in an exclusive interview with Kshitij Anand of moneycontrol.
Some of our top ideas include names like Tata Motors, ICICI Bank, SBI, ITC, Britannia, Hindalco, Colgate Palmolive India, Crompton Consumer, IOC Ltd, RBL Bank, Manpasand Beverages, Ultratech Cements and JK Cement, he said.
Below are the excerpts from the interview:
Q) FY17 already created a history as benchmark indices hit a fresh record high. Do you think FY18 will be another year of record highs or markets are likely to stay rangebound?
A) We think FY18 returns are going to be a function of revival in earnings growth. Earnings growth has been elusive so far. While the macro backdrop is solid with strong flows and reform momentum, the revival of earnings is crucial for further upsides from here. Valuations at 22.5x trailing and 18.3x forward PE do not leave much room for re-rating.
Q) What are your top stocks investors can buy in FY18 which have the potential to give multibagger returns in the next 2-3 years?
A) We are cautiously optimistic on markets and prefer companies with strong earnings visibility, good pricing power, and long term structural triggers. We like several ideas across the large cap, mid cap, and small cap space.
Some of our top ideas are – Tata Motors, ICICI Bank, SBI, ITC, Britannia, Hindalco, Colgate Palmolive India, Crompton Consumer, IOC Ltd, RBL Bank, Manpasand Beverages, Ultratech Cements and JK Cement.
From a longer term perspective, value migration owing to the disruption unleashed by government post-GST and demonetisation will mean that unorganized to organized shift across sectors – Jewelry, Consumer Electricals, Tiles, Home Building, NBFC etc – will remain in vogue for next 3-5 years.
Q) Indian market rose 18 percent in the financial year 2017, but it underperformed global peers such as Brazil which gained 31 percent, followed by Russia which was up 28 percent, and Germany which rallied 22 percent in same period. How will India fare with respect to global peers?
A) Comparison with global markets for a limited time period is little unfair as markets like Brazil and Russia had underperformed earlier.
Returns of Indian markets vis-à-vis global peers will be a function of flows and earnings revival. On macros, India has everything going for it – strong GDP growth, robust macroeconomic backdrop with twin deficits under control, inflation within targeted band and currency stable.
What is currently lacking is micros – the revival of earnings momentum. Globally, the capital will chase growth.
Q) Sectors which according to you will remain hot in the financial year 2018.
A) BFSI – largest sector with several interesting fronts opening up and the possibility of new listings – Insurance, SFB, MFI etc.
Discretionary Consumption - Autos, Consumer – Revival in consumer spending post demonetization.
Oil & Gas - OMC’s will continue to remain in focus post de-regulation and with crude prices locked in a tight range.
Q) Any advice you would want to give to your readers to start following in the coming financial year?
A) Do proper asset allocation and invest consistently and regularly over a period of time. If you don’t have the expertise to invest on your own, invest through mutual funds.
Q) Do you see liquidity tap to remain open in FY18 amid a rise in US bond yields as well as Federal Reserve rates?
A) Increasingly, over the last 24 months, DII flows have dominated the institutional flows (US$ 16bn of DII flows vs. US$ 6bn of FII flows). FII flows will be a function of dollar trade and earnings revival.
Overall we believe India will get its fair share of emerging market inflows given that it is one of the most attractive EM stories right now with a robust macro backdrop. We expect domestic flows to remain healthy as a percentage of financial assets goes up within the overall household savings.
Q) Now that we have clarity on GST, what are your expectations from the Modi govt on reform front in the next FY?
A) Flawless implementation of GST will be crucial to avoid any trade disruption and the consequent impact on earnings. Government’s push towards formalization of the economy will continue in our view.
Going forward, we expect more initiatives from the government on black money, financial inclusion, non-performing assets of PSU Banks and overall infrastructure thrust in the absence of pick up in private capex. Recent election victories in UP should augment the reform momentum.
Q) Some analysts see Donald Trump as the biggest risk to global markets. What are your views, do you also see 10 percent kind of fall in US markets if tax reforms doesn’t go through
A) It is tough to predict returns in the short term especially if it hinges on a particular event. Some part of the rally in US markets is attributable to expectations of pick up in infrastructure spending and potential tax reforms.So to that extent, it will react if the anticipated measures do not go through. However, over a long term we believe, equity markets anywhere in the world will be a slave of earnings growth.