Vinod Nair, Head Of Research at Geojit Financial Services spells out his picks across sectors which can bag multibagger returns.
As the nation and its political parties gear up for eight state elections this year, and subsequently prepare for the general elections, the upcoming Budget 2018 assumes a high significance. Finance Minister Arun Jaitley's fifth Budget is expected to be rural-focussed with over-spending on rural-infra, agriculture and job schemes, Vinod Nair, Head Of Research at Geojit Financial Services, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) The year 2018 started on a bullish note after a blockbuster 2017. The Nifty is already knocking on the doors of 11,000. Do you think the rally would continue till Budget?
The current rally is a result of strength in global macros, the expectation of strong revival in earnings led by Q3 results and Union Budget wishlists.
The start of the year 2018 has been an extension of the global positivity. The continuity of this domestic trend will not only depend on the outcome of the Budget, but also the confidence in the global market and the fallout of Q3 results and its implication to the future earnings outlook.
Q) The macro picture is fast deteriorating — at least it is not as attractive as it was back in the year 2016-2017. Do you think the hope-based rally could push the index towards record highs?
The macro had deteriorated in the calendar year 2017 due to the impact of demonetisation and implementation of the Goods and Services Tax (GST). As a result, the risk to fiscal slippage increased leading to hiking in bond yield.
This is likely to impact in the short to medium-term, but GDP is expected to improve from Q3 FY18 onwards. For example, the recent cut in GDP by CSO did not impact the market because it was a conservative forecast while the economy is trending for a QoQ growth.
Earnings growth for Q3 is likely to be in a range of 15 to 20 percent on a year-on-year (YoY) basis which is likely to be extended to FY19.
The market rally in 2018 is based more on reality than hope but the ongoing rally in the market can take a breather before seeing the eventful outcome of Q3 and the Budget. For the full year, we have a moderate outlook for the main indexes, but a positive outlook on the broad market.
Q) What are your expectations from Budget from markets points of view? Do you think LTCG could become a reality in Budget 2018?
The expectation from this Bbudget may be lesser than what market had over the last 2-3 years. This time the most important expectation is to have a good balance between fiscal and growth.
By not getting overwhelmed by the rural segment but to continue with reforms and growth-oriented initiatives. Having completed the reform over the indirect taxes, we can expect the government to shift the focus to direct tax.
The government had earlier suggested cutting the corporate tax rate to 25 percent in the Union Budget of 2015-16 and therefore we can expect some initial implementation this time.
However, given that GST implementation is not completely over, any action on this behalf will depend on the government's confidence in the fiscal management.
There are expectations to cut GST rate in food and non-food items but this is unlikely to be addressed in this budget since it has to be processed under the GST Council.
LTCG will be introduced in India for sure as a reform over direct taxation but whether it will be introduced in the next Budget is a matter of pondering.
Q) Expectations are high from the government about a likely package for the agricultural sectors to boost rural income. What are your expectations from the Budget from agri sector and what stocks are likely to benefit the most?
This is the fourth budget before the upcoming 8 state elections and general elections thereafter. The budget is expected to have a rural focus with over-spending on rural-infra, agriculture, and job schemes.
The risk is to have overwhelming benefits due to a reduction in poll confidence, primarily on account of difficulties caused by demonetisation and GST. The other risk get generated to fiscal slippage, higher government papers, and interest rates.
The market is very curious to see whether the government will be able to manage the fiscal target of 3.2 percent and 3 percent for 2018 and 2019.
The government’s 10-year yield has risen by 93 bps over the last six months to 7.38 percent. Specific measures will be towards remunerative prices on agri, credit benefits, agri infrastructure like irrigation, social security to farmers, reduction in GST and fertilisers. Stocks under our coverage which may benefit are PI Industries and UPL.
Q) Do you see bubble valuation in any sector and if yes in which sector and why?
Currently, we feel that valuation for consumer discretionary and consumer durables is trading near its peak. Over the last 2-5 years valuation has expanded from a range of 20x-30x P/E to the historical peak of 40x.
This was supported by strong earnings momentum in this sector led by raising urban population, higher per capita income, expanding consumer base and increasing affordability due to easy finance.
Additionally, the valuation has further boosted by the expectation of a shift from informal to the formal segment with the advent of the Goods and Services Tax (GST) in 2017.
Q) Valuations of small and midcap stocks are already trading at a hefty premium. Do you see the party continuing in this space and what is the kind of strategy which investors should adopt?
The valuation of small and midcap are high but may not be at a high premium. Actually, the whole market is trading at a high valuation. The Nifty50 is currently valued at P/E of 21 times on a one-year forward basis while Nifty Midcap 100 and Smallcap 100 is valued at 22 - 23 times.
Valuation has expanded as market risk reduced, economic confidence increased, a turnaround in businesses and higher liquidity and earnings growth.
The broad trend in the market will be maintained as the risk appetite in maintained. In the very short-term it will be fair to turn cautious and shift to defensive stocks and sectors like IT, Pharma, Telecom, FMCG and export-oriented companies as a safer best.
Q) Brent has already touched $70/bbl. What could be the repercussion for the market as well as for the economy?
A) The sharp up-move of oil prices from $50-55/bbl to $70/bbl was largely due to the extension of a production cut by OPEC and non-OPEC countries till December 2018 and Geo-political tensions in the Middle East.
Given India is a large importer of crude oil, elevated crude prices will have a negative implication on the economy. Higher crude prices is expected to bring hiccups in growth & profitability of domestic corporate.
Higher inflation, increase in current account deficit and potential fiscal slippages will impact market sentiments.
Q) Any top 5 stocks which could turn multibaggers according to you in the next 2-3 years?
Here is a list of top 5 stocks which we think could give multibagger returns in the next 2-3 years:
UPL has achieved healthy revenue CAGR of 16 percent over FY12-17, with stable EBITDA at 17-19 percent, despite widespread changes in regional weather patterns or swings in commodity prices and currencies.
We expect the net profit or PAT to grow at a strong CAGR of 14 percent over FY17-19 led by new launches fast-growing geographies, backward integration, and sustained market share gains.
Bharat Electronics (BEL)
BEL’s has 37 percent market share in the Indian Defence Electronics. Its core capabilities are in radar and weapons systems, defence communication and electronic warfare.
BEL has limited competition from other private players due to its niche capabilities and strong technological tie-ups. Further, strategic nature of projects, capital-intensive nature & high gestation periods acts as strong barriers to competition.
BEL’s valuation has significantly re-rated due to strong order inflow and improvement in earnings profile. Given its robust order book & healthy order pipeline, we continue to maintain a strong Buy rating for the stock.
Bank of Baroda is one of India’s largest banks with strong domestic presence spanning across 5,422 branches. The bank’s new management is gradually reinstating confidence through major changes in operating structure which will start yielding the desired outcome.
Further, we also like management’s focus on cleaning up the balance sheet and laying the foundation for sustainable growth. Moreover, gradual improvement in asset quality will lead to better profitability.
We continue to prefer Bank of Baroda among public sector banks owing to its better capital position, able management, and higher provision coverage ratio.
InterGlobe Aviation (IndiGo)
IndiGo is one of the most efficient low-cost carriers (LCC) with a market share of 40% in Indian aviation sector. IndiGo passenger traffic grew robust 31% CAGR versus industry growth of 15% CAGR, over FY14-FY17.
Expanding market presence through robust fleet addition and firming up its regional connectivity plans augurs well.
Although fuel cost advantage is fading, with higher oil prices, we expect rationalisation of ticket prices given limited scope for absorption of higher cost. We are positive on IndiGo gave increasing air travel penetration, market leadership position, and strong balance sheet.
NBCC is a Navaratna Enterprise under Ministry of Urban Development and its business verticals include project management consultancy (PMC), engineering procurement & construction (EPC) and real estate business.
Current order backlog of Rs 75,000 crore (12x FY17 sales) provides strong visibility for next five yrs. Order inflow guidance of ~Rs 30,000 crore for FY18E is keeping the outlook positive.
Execution of large redevelopment will improve revenue growth from H2FY18E. Given strong earnings outlook of 38% CAGR over FY17-19E, we have BUY rating for the stock.
Q) What will be your advice to investors for the year 2018 after a blockbuster rally seen in the year 2017?
We have a moderate expectation on the equity this year in spite of the uptick in earnings growth. But, the broad market is likely to maintain its buoyancy with higher volatility.
The stock-specific picks may be the routine of the year to outperform the market. Some stocks & sectors in the Mid and Small caps which can provide a leeway are; under NCLT resolution, chemicals, textile, PSUs, metals, home building segments, infra and capital goods.
We are also positive on defence and cement sector. We suggest to twist your equity portfolio with higher exposure to the above-mentioned sectors to outperform the market.
Q) What are your contrarian bets which hold potential to bounce back in the next 2-3 years?On a contrarian basis, long-term investors can also chip into defensive sectors like IT, pharma and telecom. Additionally, these sectors will be safer in the short-term and lucrative in the long-term. There are already signs of stabilisation and uptick in businesses while valuation is attractive.