Interview with Gaurav Dua, Head of Research at Sharekhan .
The Sensex could appreciate at the rate of 15-20 percent annually in line with the expected growth in earnings for the next few years, and reach much higher levels, Gaurav Dua, Head of Research, Sharekhan, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) It looks like the market is on steroids. It has been hitting record highs since last two months. Some analysts are already predicting a print of 14k in the next two of Modi govt. What are your estimates?
A) Favourable global conditions, faster than expected recovery post demonetisation and the ruling party gaining further political capital post the massive mandate in the UP state elections (enabling them to take forward key reforms like GST) has led to a dream rally in the past few months.
The strong foreign inflows and growing retail investor flows have further aided the momentum. However, the valuations are not cheap anymore and leave limited scope for further re-rating of price-earnings multiples in the near term.
But, the good news is that the corporate earnings are at an inflection point and set to grow at high double-digit growth rates over the next few years. Thus, the Sensex could appreciate at the rate of 15-20 percent annually in line with the expected growth in earnings for the next few years and reach much higher levels.
Q) Even though the market is ignoring all the bad news, do you see any trigger points which could result in a sharp correction in the market?
It is not practically possible to perfectly time the markets or predict the reasons for a steep correction. Having said that, we believe that it is the time that investors take some tactical decisions in their portfolio to position for any likely pullback or correction.
With close to 25-28 percent run up in CNX Midcap and CNX Smallcap indices, we, at Sharekhan, see valuations running ahead of fundamentals in many midcaps and smallcap stocks.
Consequently, it might be a good idea to reduce exposure in midcap space in favour of largecap stocks. Another way could be to book some profits and be partially in cash and/or reduce the weighted beta of the portfolio through a rebalancing exercise.
Q) What is your call on pharma pack? The sector which was considered a defensive sector sometime back is soon losing its charm? What are your views?
A) We, at Sharekhan, have a cautious view on pharma sector. Pharma companies are facing a triple whammy of severe pricing pressure in the US markets and regulatory activism by US FDA in terms of quality of manufacturing plants and processes followed by pharma companies.
Along with this, the domestic business would get adversely impacted by the government’s intends to implement a policy to encourage doctors to prescribe generics rather than high cost branded drugs.
Thereby, impacting margins of the domestic formulation business. We believe that the underperformance of the pharma companies could persist as they struggle to readjust their business models.
Q) Any top five stocks which you think has the potential to deliver multibagger returns in the next 2-3 years and why (with rationale)?
A) Our preferred picks are Aditya Birla Fashion, L&T Finance Holdings, Finolex Cables, Sundaram Fasteners, MEP Infra. They are quality companies with a proven pedigree with the structural growth story.
Q) How do you rate the March quarter earnings? Most analysts are factoring a growth rate of 15-20% by FY18-19. Do you agree with the estimates?
A) March quarter has been a mixed bag. Major negatives with weakness in IT services, pharma and consumer durable stocks (severe margin pressure in Havells India, V Guard, Orient Consumer etc).
The silver lining is the signs of peaking out of NPAs with a sequential decline in slippages for large corporate lending banks especially SBI. Also, the volume growth in FMCG is in the range of 3-4 percent which is healthier than expectations and the management of companies confident of faster recovery despite hiccups from the implementation of GST.
Consensus growth estimates of Sensex EPS are quite steep and is based on expectations of significant improvement in PAT of banks (NPA provisions lower ahead), stable commodity prices and a healthy revival of consumer demand (good monsoon and GST benefits in FY2019).
We believe there could be some downgrades in consensus estimates; however, we are at the cusp of a strong revival in corporate earnings.
Q) GST is now closer to becoming a reality. The one nation one tax is good for the economy but in the near term analysts predict disruptions. Do you agree? If there are disruptions, will it impact markets?
A) Markets normally tend to adjust and digest known concerns or issues. It is the unknowns that tend to have a meaningful impact on markets. Since the disruption in earnings for a couple of quarters is already known to investors, we believe that the market would not react too negatively to weaker results.
On the other hand, the management commentary and signs of a strong revival in the second half of FY2018 would be key monitorable for the markets.
Q) With the implementation of GST which market theme will get benefitted the most – largecap, midcap or smallcap and why?
A) The impact would depend on industry segment or nature of business rather than on market capitalization.
Q) What is your guru mantra you would like to share with your audience for wealth creation?It starts with building a well-balanced portfolio of carefully chosen quality companies rather than chasing momentum. Track developments affecting companies within your portfolio. But, at the same time, one needs to be disciplined and keep patience for the investments to blossom.The Great Diwali Discount!
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