Our one-year target of Nifty-50 and Sensex is 13,400 and 45,500, respectively. This works to be an upside of 10-11% from current levels, Rusmik Oza, Sr. VP & Head of Fundamental Research at Kotak Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Q) What is your outlook for the year 2020? 2019 is expected to end with gains of 10%, do you think we could do better in 2020?
A) We expect FY20 GDP growth to be 4.7% and on this favourable base we expect FY21 GDP growth to move up to 5.5%. Cyclical sectors that have been hit hard in this fiscal year can show better growth numbers in FY21 because of the base effect.
On valuations, the Nifty-50 Fw PE is trading closer to its previous peaks of ~19x leaving very little scope of any further re-rating. Within the Nifty-50 a handful of leading stocks have seen huge outperformance in this calendar year taking valuations closer to the previous peak. If one excludes these handful of stocks then most of the other stocks are trading at or below their 10 year average valuations.
We expect Nifty-50 to still deliver double digit returns in CY20 on the back of strong earnings growth and rotation in stock performance.
Q) Do you have a Sensex or Nifty December-end target for 2020? If yes, what is the basis of your assessment?
A) Our one year target of Nifty-50 and Sensex is 13,400 and 45,500, respectively. This works out to be an upside of 10-11% from current levels. The 10-year average Fw PE of Nifty-50 works to 15.5x. We have used a benchmark of 17.5x Fw PE, which is one standard deviation above the 10 year average to derive at our one year Nifty target.
The current Bond PE stands at 14.7x and the 10 year average premium of equity PE over bond PE has been 260 bps. Hence a 17-18x Fw PE benchmark for equities is justified. The annualised inflows by way of SIPs is now closer to USD 14 bn, which seems to be quite sticky in nature.
Keeping all these factors in mind like earnings growth, flows and valuation benchmark we derive at our one year target for Nifty-50 & Sensex.
Q) What are your expectations from the Budget? Do you think we could see a personal tax cut in the coming year?
A) We don’t have any list of expectations from the Budget. On broader numbers, we expect FY20 Gross Fiscal Deficit as a percentage of GDP (GFD/GDP) ~3.8% without any expenditure cuts given a net tax revenue shortfall of Rs.2.2 trillion, part of which will be met through higher RBI dividend and higher disinvestment. However, if the government chooses to stay on the path of consolidation, it could reduce revenue expenditure in some of the social schemes (such as PM-KISAN) along with shifting of food subsidy to the FCI.
With these adjustments, FY20 GFD/GDP should be around 3.4%. Based on our economist calculations, personal income tax collections could be lower by around Rs 500 bn if the government were to implement most of the DTC panel recommendations in FY21. Any major tax relief could give boost to consumption and would be taken positively by market participants.
Q) What are the sectors that are likely to hog limelight in the year 2020 and why?
A) Sectors likely to outperform in next year are: Agro Chemicals (due to above normal rainfall seen this year); Corporate Banks (earnings could go up in multiples between FY19-22E.); larger NBFCs (Post NBFC Liquidity crisis, larger Housing Finance companies and NBFCS with strong parentage will garner higher market share); Construction (companies are having healthy order book position although pace of new order intake has slowed down.
Deleveraging has continued with likely free cash flows in FY20-21E); Mid Cap Cement (Healthy earnings growth and improving RoEs will lead to re-rating); Oil & Gas (After a poor show in FY19-20, earnings growth to be very healthy in FY21. Within the space we are more bullish on gas distribution companies as revenue & earnings visibility is high).
Q) Any top 5 stocks which you think are available at attractive valuations and can still be considered a buy on dips?
A) Top five stocks that are available at reasonable valuations and worth accumulating in every dips are: SBI (trading at 1.4x FY21E book value for potential RoE of ~15%); M&M (trading at 12x consolidated FY21E PE with ~35% of price target being ascribed to subsidiaries); Petronet LNG (trading at PE of 13x on FY21E and with potential RoE of ~26%); Federal Bank (trades at 1.2x FY21E book value and likely to report RoE of ~13%) and Aster DM Healthcare (trades at 7x FY21E EV/EBITDA as compared to peers trading at 15x).
Q) What should be the investment philosophy for investors in the year 2020?
A) In the current slowdown we have seen most old economy sectors witnessing erosion in market cap. At the same time most of the high growth sectors and defensives like consumer staples and consumer durables have seen good accretion in market cap.
In terms of valuations we see most consumer stocks trading at price to perfection levels. We see valuations attractive in sectors like capital goods, utilities, oil & gas, construction, healthcare, metals & mining and auto ancillaries. Certain sectors like Automobiles and cement are beaten down but they are still expensive in terms of valuations.
In terms of market-cap orientation our preference for CY20 would be towards small caps as the Nifty Small Cap Index has come closer to its previous bottoms in terms of relative underperformance to Nifty-50. One should go slow on richly valued sectors and stocks like consumers staples/discretionary/durables.
Probably the beaten down sectors of CY19 could turn out to be the outperformers in CY20 based on recovery in earnings and supressed prices/valuations.
Q) Do you think growth has bottomed out in September quarter? And, the likely outperformers could be the small & midcaps in 2020 compared to largecaps?
A) The GDP growth in 1H-FY20 has averaged at 4.75% and we have cut our full year FY20 GDP growth estimates to 4.7%. This means the growth rates in second half could be similar to that seen in the first half. Our thesis is that the current slowdown is more structural in nature than cyclical as visible from lead indicators and the degree of slowdown.
However when it comes to corporate earnings we had seen major deterioration in earnings from Dec’18 quarterly numbers. Hence, bottoming of earnings of beaten down sectors could play out from Dec’19 quarter and optically we could see earnings growth from either Mar’20/Jun’20 quarter (on lower YoY base). We can expect mid & small caps to outperform the large caps only if we see some material improvement in the economy in FY21.
Q) Do you think earnings growth will start looking up from FY21?
A) We are estimating earnings of Nifty-50 to grow by 10% in FY20 and 27% in FY21. The earnings growth of Nifty in FY20 will be led by banks, consumer staples, diversified financials/NBFCs and Reliance Industries. In FY21 earnings growth will be led by Banks, Metals & Mining, automobiles and Reliance Industries. Much of FY21 earnings growth of Nifty-50 hinges on the profit growth of banks.
The lower base of FY20 for many old economy sectors could lead to higher growth in FY21. On the contrary many full tax paying companies will see a jump in FY20 profits which will prove to be hindrance for FY21 earnings growth.
Q) What are the key takeaways or lessons for investors for the year 2019?
A) The biggest lesson of 2019 is that quality will outperform whenever there is persistent slowdown, no matter what valuations they trade at. We have seen that in many consumer and defensive stocks.
Another takeaway from 2019 is that ‘Big is getting Bigger’ and ‘Small is getting Smaller’. This has been observed in many sectors in the course of this year. Poorly governed companies or companies having suspect in their financials are getting punished by investors and fund managers.
When there is a severe slowdown in the economy and various sectors are reeling under pressure then one needs to be nimble footed and shift investments to high growing sectors and slightly larger market cap oriented companies. One should always go for quality stocks which are available at reasonable valuations although they may not have delivered the desired returns in the last few quarters.
Value stocks without any earnings growth or likely earnings growth in future are ‘Value traps’. Hence avoid value traps or holding companies as they are fancied only in the last leg of any bull market.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.