Rupee depreciation will have an impact on some companies that have significant foreign currency debt and could wipe out a significant portion of their earnings, Naveen Kulkarni, Head of Research, Reliance Securities, said in an interview to Moneycontrol’s Kshitij Anand. Edited excerpts:
What is your near-term outlook on rupee for FY19?
Our technical indicators say that rupee should consolidate around Rs 72.3 levels. Fundamentally, considering the strong GDP outlook and inflation not getting out of hand, we believe there may not be a significant downside to the currency from the current levels.
The Indian rupee was overvalued on REER basis and some correction was due but further steep declines seem unlikely.
How will falling currency impact India Inc. (especially debt-heavy companies) govt as well as fiscal math?
The Indian companies’ foreign debt is significantly lower compared to last 10 years. Rupee depreciation will have an impact on some companies with significant foreign currency debt and could wipe out a significant portion of the earnings.
Meanwhile, rupee depreciation will have an impact on inflation and domestic bond yields which in turn will have a negative impact on banks and treasury income. Similarly, the rising cost of funds will have a negative impact on the NBFCs.
Some experts are debating on the fact that the current rally of 2018, which took the indices to all-time higher, is boring and the worst since 2008 because only 63 NSE 500 companies hit life-time highs compared to over 200 in 2008?
‘Boring’ is generally good from a market standpoint as it indicates caution and conservatism. Markets have hit a lifetime high by focusing on quality and earnings growth profile.
The year 2008 was marked by irrational exuberance and we are far from such levels of exuberance. This means the market breaking down suddenly and entering bear territories is quite remote.
Talking about 2008, we are approaching the 10-year anniversary of Lehman Brother bankruptcy. Any incident which you can recall from 2008 and your learnings from the event. Even a small amount invested in the 2008 crash would have made many crorepatis in just 10 years.
After the 2008 crisis most stocks corrected and even the fundamentally strong names corrected big time. However, companies with strong cash flow profile and domestic consumption came out stronger. Investments in domestic consumption themes have been the biggest success stories of the last 10 years.
In an environment of rising interest and bond yields, should investors change their approach towards investing? Which funds are most ideal to be included in your portfolio and why?
In this environment of rising uncertainty holding a diversified large-cap portfolio provides a greater insulation to the market risks. We advise investors to increase their weights to diversified large-cap funds over small-cap funds.
Any top five stocks which you think satisfy the criteria of value at the great price and why? This is for an investment horizon of 1-2 years.
Here is a list of top five stocks for a time horizon of 1-2 years:
Bajaj Auto: Strong volume growth and revival in exports will lead to earnings recovery. Moreover valuations are reasonable.
Cyient: High-quality IT Company with niche positioning. The company has a reasonably strong growth profile and valuations at trading at a discount.
ITC: It is a high-quality consumer company which is available at a steep discount to its peers. Even the Cigarettes business is also showing signs of improvement.
Sun Pharma: Sun Pharma is a solid turnaround story on offer. The earnings growth is likely to improve significantly in the forthcoming years.
Titan Company: Formalisation theme is very strong in the jewellery segment. Earnings will continue to compound at 20 percent CAGR over the next three year. It is a strong business to own.
Considering rupee as a tailwind, is it time for investors to go overweight on IT and pharma sector?
We have significant overweight positions in both IT and Pharma sector. Both sectors will show superior earnings growth and have the capability to re-rate further from the current levels.
Both the Sensex and Nifty are trading at their all-time highs. Some experts are fearing a fall of about 10% and even the upside remains fairly limited. What are your views?
While we believe the upside in the near-term is capped because of macro challenges but we do not see a significant downside as earnings growth for the current year are going to be robust.
We expect strong earnings growth trajectory which started in 2HFY18 to sustain through FY19 and extend to FY20.
FIIs have been sellers in recent times while domestic retail investors are filling the shortfall. Do you think the momentum is likely to continue?
FIIs were sellers most of the year but turned positive in the last two months. This trend could sustain if earnings momentum continues in the next quarter.
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