We expect allocations to move to non-HRITIK stocks in largecaps and into midcaps (having a market cap above Rs 8,000 cr), Vinay Pandit, Head, Institutional Equities, IndiaNivesh, said in an interview to Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) It was a historic week for Indian equity markets with gains of nearly 3% for the week ended November 1. What is your view of markets in the coming week? Will the Nifty hit a fresh high or have we topped out?
A) This is in line with our view, where we said that the Nifty will hit new highs around Diwali. Largecap earnings growth has gone up by 15-18 percent, which augurs well for the broader markets and the index earnings.
Two major factors are contributing to this. First, the lower tax rate has averaged out the higher tax provisioning of Q1 over the lower tax for Q2, thereby cutting the tax provisioning for Q2 to 15-18 percent.
Second, the low base effect over the last year’s Q2 is being seen now, especially in auto volumes. We don’t believe that the Nifty has topped out, though multiples may have topped out for certain frontline stocks.
We expect allocations to move to other non-HRITIK stocks (HDFC, RIL, Infosys, TCS, HUL , IndusInd, and Kotak Mahindra Bank) in largecaps and into midcaps (having a market cap above Rs 8,000 cr).
HDFC Life and SBI Life were seen diluting equity and are now in the race to enter the Nifty (free float methodology) potentially replacing Yes Bank/Bharti Infratel.
Q) What is your view of the auto sales numbers for the month of October? Do you think things have bottomed out and can the auto sector be a dark horse in 2020?
A) Auto sales numbers have been encouraging. However, Maruti Suzuki India is still a long way from getting the premium 30x multiples, which it commanded in the past. To get there, it will have to start doing sales volume numbers of 160-170K per month.
However, this will still yield lifetime low margins and ROEs, thereby offering profit-booking opportunity every time it crosses Rs 7,500-7,700. As a house, we have a ‘sell’ rating on the stock, with a target price of Rs 5,700 based on 23x FY21E earnings.
TVS Motor numbers were disappointing on the two-wheeler side. We expect Hero Motors and Bajaj Auto to throw up positive surprises, led by festival season sales, rural demand and strong support to the channel, coupled with a focus on liquidating BS-IV inventory.
Eicher Motors may do well on liquidation of inventory in the system for the quarter. However, competition from Jawa and cannibalising its products portfolio between 500CC & 650 CC, as well as between Classic 350 and Bullet 350, could hamper expectations of incremental volumes.
Exports could throw up major surprises in the coming months as displayed in October data. We expect the pain in CVs (commercial vehicles) to continue for some more time before economic activity picks up significantly while being attractively valued.
The sector witnessed a bottoming out in Jul-Aug’19, and we may see positive spurts on performance for select companies such as Hero Motocorp, Bajaj Auto and TVS Motors.Q) The last 11 years data suggest that November usually belongs to the bears. The Sensex closed in the red in November in seven of the 11 years. Do you think 2019 will be different?
A) While such data points will always pop up, we believe broader market trends need to be studied. November in the last 11 years has been positive four out of 11 years. At the same time, September, October, and December have been positive 50% of the time. September 2019 was up 6.3% vs September 2018 (-5.6%). October 2019 was up 4.6% vs October 2018 (-5.6%).
November has started on a positive note and can be expected to close on a positive note just like November 2018, led by good festive sales, lower tax rate giving a boost to corporate earnings and the bottoming out scenario in certain sectors.
These kinds of data points are of little relevance to long-term investment strategies and can be easily ignored. Overall earnings performances of most companies have been good for Q2FY20 vs Q2FY19 when there were more misses than hits.
Analysts continue to be conservative on the back of weak expectations for the year, which is a good hidden opportunity to invest for the long-term in quality stocks at low valuations.
Q) Any important events to watch out for in November?
A) While the government has addressed supply-side concerns, the demand-side concerns need to be addressed as well. While not as early as November, we expect rationalisation of tax slabs in the upcoming budget in February 2020, easing out of the Long Term Capital Gains Tax, and improving corporate governance to be the key factors for the market starting next year.
Indian IIP data may disappoint but seems to be bottoming out over there as well. Green offshoots are visible in several beaten-down sectors like autos and auto ancillaries, NBFCs, banking, infrastructure, defence, apparel retail, domestic pharma, among others.
Q) How is the November series likely to pan out for investors? What are the bright spots if we look at the October series rollover data? Which stocks are likely to be on the list of bulls and those that will remain in the grip of the bears?
A) There is money to be made on the table by investing and trading in quality companies. Good companies are offering enough investment opportunities at low valuations on the back of strong performances and quality corporate governance.
Autos (two-wheelers) and auto ancillaries, resolution of banking & NBFC issues, defence ordering, pick-up in retail, and the strong performance by companies in domestic pharma will keep bulls busy, while airlines, telecom, passenger vehicles, capital goods, real estate will keep the bears busy.
We believe that the overall direction of the market is positive now, having seen time as well as an earnings correction across sectors over the last 18 months.
The positive FII inflows seen over the last 10-15 days coupled with continued inflows into mutual funds (as SIPs inflows continue to make lifetime highs) augurs well for overall markets and long-term direction of Indian markets.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.