'Strong trend in IPOs can only get shattered if Sensex crashes 10% or more'

The optimism of the market is the recovery of earnings growth in spite of premium valuation which market expects to be maintained.

It look like the market has climbed wall of worries — earnings growth, muted macros and geopolitical concerns? What is your target for Nifty and Sensex for FY18?

Our current Sensex target for March FY18 is 31,000 which was reduced last quarter by 5 percent due to a poor start to financial year result.

Any update to the target will depend on the performance of Q2 result which is looking promising compared to earlier expectations.

The IPO mania has gripped D-Street with most primary offers getting oversubscribed multiple times? Do you see the trend continuing for Samvat 2074? What is the kind of money we are talking about?

This trend is likely to be maintained as the market is breaking its own high, premium valuation of the secondary market which may be attracting investors towards IPOs and as many companies are waiting for a nod from SEBI due to attractive pricing.

This trend cannot be shattered unless the market falls by more than 10 percent disturbing the confidence of retail investors who are currently shifting their liquidity towards primary, secondary and MF.

This is owing to a change in investment style of public from physical to financial assets due to investor awareness and structural reform undertaken by the government towards cash hoarding.

Small and midcap index fresh record highs. What is your call on the broader market? The euphoria doesn’t seem to die down? What should investors do — keep accumulating or book profits?

Currently, we have a cautious view on the broad market due to high valuation, slow growth in earnings than required and change in global liquidity due to the appreciation of USD.

At the same time, we are constructively positive on India since the premium valuation of the country is likely to be maintained over the long-term as country risk are reducing.

We are also positive on specific sectors and stocks gave improvement in business outlook and enhanced profitability for organised players over the next 1-2 years which is very attractive for equity as an investment class.

Our idea to retail investors is to be stock & sector specific to outperform the market.

Some analysts expect earnings to recover slightly in the September quarter. What are your views?

We too agree with the view. In Q1, earnings growth for Sensex was negative at -6.5 percent on a YoY basis, the worst is over. Now, for Q2, the expectation is over 6 percent on a YoY basis and will expand further by the end of H2FY18. This is also visible in core economic data which have started to reverse since June-July.

Any 3-5 sectors which are likely to lead next leg of the rally?

We are very positive on sectors like private finance, auto, core infra, defence, agro, and chemicals.

Any top five stocks which you think are under-owned but have tremendous potential to deliver strong returns in next 3-5 years?

Can Fin Homes

Can Fin Homes (CFHL) is one of the best-placed housing finance companies (HFCs) with best in class asset quality and strong return ratios. It is also the fastest growing HFC with a strong loan book CAGR of 38% over FY12-17.

Indian economy would require an investment of around USD1.0tn over the next five to seven years to meet the increasing infrastructure and housing demand at the current growth levels.

CFHL has a strong marketing and distribution network of 170 outlets spread across 19 states and is well placed to exploit the huge growth opportunities.

We believe that the renewed vigour to expand balance sheet and new branch additions in recent months will help the company to sustain a loan book growth of 25 percent CAGR over FY17-19E.

Tata Motors

Tata Motors is India’s largest CV manufacturer is aiming to increases its current market share from 55 percent to 60 percent in two to  three years on the back of six new launches and four new launches in ILCV segment in FY18.

PV standalone sales growth for H1FY18 was 12 percent YoY led by the success of recent launches including Tiago, Tigor and Nexon and the trend to continue for a full year.

We project overall revenue & PAT growth of 13 percent and 33 percent CAGR over FY17-19E, driven by 10 percent growth in JLR volume and successful launches in the standalone business.

We value the stock on SOTP basis, ascribing separate value to JLR (3.5xEV/EBITDA), China JV (3.5x EV/EBITDA), standalone (8x EV/EBITDA) & investment in subsidiaries (using P/E, P/BV), recommend Buy rating with a target of Rs508.

NBCC

Mammoth order book of Rs 75,000 crore (12x FY17 sales) provides strong visibility for next 5 years. NBCC is at the sweet spot with an inflow guidance of Rs 25,000 crore for FY18E, limited competition, and expertise in executing large projects.

Execution from large redevelopment is likely to improve from H2FY18E which will add impetus for re-rating. With pick up in execution, we factored earnings to grow at 42 percent CAGR over FY17-19E supported by 60bps improvement in EBITDA margin.

Considering the asset-light PMC segment, less leveraged balance sheet and robust opportunities in the pipeline, NBCC will command premium valuation in the construction space.

Bharat Electronics

Bharat Electronics Ltd (BEL) has 37 percent market share in defence electronics and its core capabilities are in radar & weapons systems, defence communication & electronic warfare.

BEL has limited competition, due to its niche capabilities and strong technological tie-ups, strategic nature of projects, capital-intensive nature & high gestation periods act as strong barriers to competition.

Going forward, BEL will emerge as a key beneficiary from on-going defense modernization programmes & GoI focus on indigenisation. The current order backlog of Rs41,052cr is 5x FY17 sales, which has significantly improved the earnings outlook.

Aarti Industries

AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. Has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments.

Exceptional performance over FY11-FY17, Revenue and PAT grew by14% & 25% CAGR, respectively. Focus on high margin products and cost reduction through forward and backward integration led to expansion in EBITDA margins to 20.7% from 13.6% during FY11- FY17.

During last 2-3yrs, ARTO is aggressively building CAPEX in various product categories with a focus on global markets.

Currently, global chemical companies are de-risking the supply chain for their raw material by diversifying from China to India, which will benefit domestic companies like ARTO.

The way domestic money is flowing into equity markets – do you think it is a cause of worry? Equities are high return but at the same time high-risk instruments. There is always a possibility of a negative return – will that dent optimism?

As mentioned in the earlier question, this change in the domestic liquidity is a big transformation and it had happened very recently which is unlikely to stop very soon.

This trend is likely to be maintained unless the investment methodology of retail investors changes, attractively of financial assets reduces and a hike in global or domestic risk.

Regarding negative return, it is completely possible also mentioned by our cautious view on the board market in the near-term and moderate expectation for 1 year return. Currently, the supply of domestic investment money is able to accommodate the demand of scrip which we believe is largely under fair valuation.

What is one thing or habit you want investors to start this Diwali with respect to trading or portfolio?

Have reasonable expectation in-terms of return over the next one year, invest in equity with a portfolio manner with a wait and watch approach over the next 6 months. Always stick with quality.