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Last Updated : Nov 28, 2018 02:21 PM IST | Source: Moneycontrol.com

Prefer small, midcaps over largecaps; corporate banks attractive for 2019 as NPAs peak out: ICICIDirect

The underlying macroeconomic growth coupled with corporate earnings growth momentum is likely to be a key catalyst for the market movement, says Pankaj Pandey, Head-Research, ICICIdirect.com.

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With worst of the asset quality concerns behind us in the banking space, pick up in industrial activity as well as robust consumer sentiment, we expect Nifty earnings to stage an impressive CAGR of 18.5 percent over FY18-20E to arrive at a target of 12,100, Pankaj Pandey, Head-Research, ICICIDirect.com, said in an interview with Moneycontrol’s Kshitij Anand.

Q. What is the sense you are getting from markets?

A. The underlying macroeconomic growth coupled with corporate earnings growth momentum is likely to be a key catalyst for the market movement.

We note pick-up in industrial activity coupled with robust consumer demand both at the urban as well as the rural front remains the silver lining.

The resilient corporate earnings growth across most of the pockets is another positive. However, it is likely to be a volatile ride wherein we need to keep an eye on global tariff war news flows, crude volatility coupled with domestic macroeconomic factors, and election outcome.

Q. How did India Inc. perform in September quarter?

A. The Q2FY19 results were encouraging with nearly 20+ percent growth in the topline while margin compression amidst high commodity price led to muted bottomline growth.

Therefore, while the earnings have certainly picked up after near flat spell over FY14-18, the pace of growth is not too exciting. The earnings downgrade in Q2FY19 was largely contributed by the banking and auto space.

We, however, are of the opinion that we are nearing the end of earnings downward cycle. We expect Nifty earnings to stage an impressive CAGR of 18.5 percent over FY18-20E.

 Q. Do you feel that FIIs are back in Indian markets? 

A. With the sharp decline in crude prices (almost 30 percent in seven weeks), a key macro headwind for India has been addressed and the same is reflected in Indian rupee (appreciating over 4.6 percent in November, which is the strongest recovery in Asian FX).

With crude price outlook fading on excess supply concerns and the US Fed adopting a slightly dovish tone, strong EM stories have started to make comeback.

India is stacked well in the current set up and FIIs are likely to renew their focus on Indian Capital markets.

India continues to offer one of the highest positive real rates (accretive bond inflows) and equity markets have also cooled off over 10 percent from its record high in Jan 2018 and looking more compelling based on the forward growth projections.

Q. What are your views on the recently concluded board meeting of RBI and the government? 

A. RBI and government in the board meeting finally concluded that an expert committee is needed to arrive at a consistent framework for RBI reserves requirement and thereby the transfer possible.

It indicates RBI is not rigid on transfer but needs the same to be decided by experts. Considering that the talks about the resignation of governor did not materialize, markets took it positively.

CCB buffer extension by one year was a marginal relaxation versus the demand to cut Basel III to align with international standards. Hence, it was largely a non-event.

Q. What are your expectations from the upcoming RBI policy meet in December?

A. RBI, in its policy meet in December is not expected to touch repo rate and a status-quo can be expected. The two most important variables after inflation are crude and currency that have now corrected from their peaks which provides the breather.

Therefore, unless core inflation sees a material upsurge, the upcoming monetary policy can be seen as a non-event.

Q. Given sudden appreciation in rupee, do you it is time to re-look at IT and pharma?

A. In the IT Space, as the demand remains healthy, it is mixed with caution due to talent supply crunch (leading to increase in localisation and subcontracting cost), rising employee costs in wake of high attrition and rupee appreciation.

Hence, we remain cautiously optimistic about the IT Sector.  We believe companies that have adopted higher localisation have a strong deal pipeline and valuation comfort will do well.

Similarly, on the pharma space, we remain positive on pockets which have posted upbeat Q2 earnings and are still below their fair valuations after the earnings upgrade.

Q. Do you think largecaps offer still a better bet compared to mid & small-caps? 

A. We continue to like broader market over the largecaps. We also note the market is witnessing a strong divide in valuations across quality and ordinary businesses notwithstanding market capitalisation which warrants that investors should be stock specific now.

Emphasis should always be on buying a business that are run in a capital efficient way and possess sustainable growth prospects.

Q) What are the sectors according to you are recommending to your clients and why? 

A. Among the sectors, we are positive on pharma (stabilised US, strong growth in India, improved margins), corporate banks (peaked out NPA cycle, asset resolution), IT (strong deal pipeline and valuation comfort) and capital goods (strong order inflows, improved working capital cycle).

Corporate banks remains one of the preferred sector to look forward to as the NPA cycle has peaked, while asset resolution also bodes well. We expect sharp earnings recovery, next year, on a benign base.

Q. What is your target for Nifty for the FY19? 

A. Going forward, with worst of the asset quality concerns behind us in the banking space, surge in industrial activity as well as robust consumer sentiment, we expect Nifty earnings to stage an impressive CAGR of 18.5 percent over FY18-20E. We assign a P/E multiple of 19.0x to FY20E Nifty EPS of Rs 636 to arrive at a Nifty target of 12,100.

Q. Any top five stocks which you consider are a good buy at current levels after the recent fall from highs for a holding period of 1-2 years? 

A. Our stock picks after Q2FY19 earnings are:

Aditya Birla Fashion & Retail Ltd:

ABFRL has delivered a superior performance in profitability terms for H1FY19, with EBITDA margins expanding 200 bps YoY and PAT coming in at Rs 48.3 crore versus net loss of Rs 30 crore in H1FY18.

We anticipate H2FY19 will perform better, particularly Q3FY19 on account of a shift in major festivals. We expect revenue, EBITDA to grow at a CAGR of 14 percent, 24 percent, respectively, in FY18-20E.

Tata Steel: 

We like Tata Steel for its integrated operations (100 percent iron ore and ~30-35 percent coking coal), which aids in clocking higher EBITDA/tonne vis-à-vis its domestic peers even in increased input cost scenario.

State Bank of India:

Given improving industry credit growth and a possible shift of business from NBFCs, SBI is best placed to ride the opportunity. We expect credit offtake to surge to 11 percent CAGR in FY19-20E.

The bank is also poised to benefit from the faster resolution of NCLT accounts. Pick-up in growth and focus on maintaining credit cost will result in sharp improvement in its earnings trajectory.

Indian Hotels:

The company plans to add 20 new hotels through management contracts that will further boost the topline, going forward. In addition, cost rationalisation and RevPAR growth are expected to drive margins in FY18-20E. Hence, we have a positive view on the stock.

L&T:

Given strong backlog, front-loading of order inflows, improving balance sheet quality (CFO generation), the company is well placed to deliver a 14.2 percent and 20 percent revenue and PAT CAGR in FY18-FY20E, respectively.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Nov 28, 2018 02:21 pm
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