B Gopkumar, ED and CEO, Reliance Securities, says a number of quality stocks have become attractive after the recent correction and these can be value investments.
B Gopkumar, ED and CEO, Reliance Securities, says a number of quality stocks have become attractive after the recent correction and these can be value investments. “A retail investor should make an asset allocation plan. If someone has a 10 year horizon, he should make equity investments an integral part of that plan."
Following are the excerpts from his interview with Moneycontrol’s Sunil Shankar Matkar…Q: Can the market sustain at high valuations despite lack of corresponding earnings growth? What are your FY18 and FY19 earnings estimates for the Sensex/Nifty?
A: Given the worsening macro scenario and likely inflationary pressure in ensuing months, led by higher oil prices, premium valuations are completely dependent upon the earnings trajectory of companies. A look at 27 companies forming part of the Nifty (excluding banks) shows that adjusted earnings have improved by around 12 percent year-on-year (YoY) as against expectations of 15-20 percent growth. The management commentary of companies has been encouraging as volume growth was robust across sectors. Hence, earnings growth can potentially improve further in coming quarters, which may lead to sustainable premium valuations. The market may also be supported by a persistent flow of domestic liquidity into equity mutual funds. We foresee earnings growth to be in the 15-20 percent range in FY19.
A: It is difficult to predict crude oil prices in the near-term. However, there is an upward price bias in the short-term due to supply pressures owing to the recent sanctions in Iran imposed by the US and ongoing production discipline between the Organisation of the Petroleum Exporting Countries (Opec) and Russia. We are hopeful that prices should reverse to $70/bbl levels in the medium-term as higher oil prices tend to impact global economic growth, which ultimately hampers oil demand. Consistent increase in oil rigs in the US (US oil production surpassed 11 million barrels per day) along with the likely breach of production discipline by Opec members at high prices may support oil prices to reverse going forward.
A: Higher oil prices will certainly impact India’s twin deficit as we import around 80 percent of our total oil requirement. India’s oil import bill for April stood at $10.4 billion (up 41.5 percent YoY). If we extrapolate this figure, India’s oil bill for FY19 is likely to be around $120-125 billion as against $87 billion in FY17. Hence, this incremental bill is certain to have major ramifications on our fiscal deficit, which can also hurt economic growth to an extent.Q: Do you expect the market to hit new highs in second half of 2018 despite higher crude oil prices and volatility due to state elections?
A: Nifty is hardly 500 points away from its last all-time high hit in January. Hence, surpass of that level cannot be ruled out given the earnings recovery of companies. We will have two elections in Rajasthan and Madhya Pradesh in second half of 2018. A positive outcome in favour of the National Democratic Alliance (NDA) with a stabilisation in oil prices can augur well for the market.Q: Will state elections give some indication to the market about the general elections in 2019?
A: Given the fact that the upcoming elections in MP and Rajasthan are NDA governed states, it will probably give some indication about the electorate’s mood ahead of general election in 2019. At present, the NDA is ruling in over 20 states. Hence, the outcome of these two states will be taken as an indicator of the likely outcome of general election in 2019.Q: How do you read the quarterly earnings announced so far and do you expect a sharp earnings recovery in FY19?
A: Around 40 Nifty companies have reported their Q4 FY18 earnings so far. Excluding banks, 27 companies have reported average earnings growth of around 12 percent, which is certainly lower than our expectations. Considering the management commentary of companies, we foresee earnings recovery in FY19 is to be better than FY18. We expect 15-20 percent earnings growth in FY19.Q: Asset quality concerns continued in the March quarter, in fact some banks reported their biggest quarterly loss. Do you expect the trouble to continue in H1 FY19 as RBI has been changing its rules and regulations to minimise non-performing asset (NPA) woes?
A: After the Reserve Bank’s circular regarding recognition of NPAs in February, all banks have reported higher-than-normal slippages in the March quarter. We don’t expect a major upward move in slippages in FY19 as almost all categories of bad assets have now been reported in NPAs.Q: Will FY19 be a year of midcap, smallcaps or largecaps?
A: FY19 will be a year of quality stocks, irrespective of their market capitalisation. Most midcaps and smallcaps have delivered very high returns over the last 2-3 years without much earnings support. The recent correction in midcaps and smallcaps is a consequence of high valuations without earnings growth. Many quality stocks have become attractive after the recent correction and these can be value investments from hereon.Q: What strategy should investors in the 35-40 age bracket adopt to become a crorepati in the next 10-20 years?
A: A retail investor should first create an asset allocation plan. If someone has an investment horizon of 10 years, investments in equities should be an integral part of that plan. At a young age, more capital should be allocated to equities for investing on a regular basis. In India, equities have delivered more than 12 percent yearly returns for the last 15 months. In a growing country, where per capita income is still a fraction of the developed world average, equities will keep providing better returns. Therefore, the road to riches goes through equity but it requires patience to practice it.Q: In the past five years, what have been the big changes in the broking industry? What has been the impact of these changes on the industry and your business?
A: The shift from offline to online trading, growing prominence of mobile among online platforms, and emergence of data science are some key changes. This has resulted in the investing community taking informed decisions. The focus of brokers is no more partial to equity broking, but shifting to emerging asset classes like mutual funds and insurance.The impact of these changes on the mobile platform has evolved from just being the core for facilitating trades on the go, it now imparts information and provides access to transact across MFs and insurance solutions.