The break-out above the previous peaks could be a function of NDA government coming back to power. If the current NDA formation comes back to power then we could see a broader bull run with new highs being crossed in this calendar year, Rusmik Oza- Head of Fundamental Research, Kotak Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Sensex has rallied 3,000 points in a month. Can this be seen as the start of a fresh bull run?
A: We are still in a bull run. The recent fall in Sensex and Nifty was an on-going correction as both the indices sustained above their respective 200 DMAs. The current rally can re-test the previous highs and fresh rally could start once we break the previous peaks of both Nifty & Sensex.
The break-out above the previous peaks could a function of NDA government coming back to power. If the current NDA formation comes back to power then we could see a broader bull run with new highs being crossed in this calendar year.
Q: The year so far has not been great for IT stocks after a strong last year. Would you take exposure to the sector and what is outlook for the year?
A: The IT Index is up 25 percent in the last one year and has outperformed the broader indices. Based on our house view, average one year upside in top 6 largecap IT companies works to just around 7 percent.
Earnings growth in FY20 could disappoint as rupee has appreciated smartly against the USD. Based on US Fed's outlook, it seems the Dollar Index could underperform other currencies, which could remove the currency upside from future earnings growth.
Q: Many banks are at multi-year highs. Is there more value in those banks?
A: We remain positive on the banking sector. There is value in most banking stocks. Within the banking sector our first preference is toward hard core corporate banks followed by private sector banks.
Within the PSU banks we prefer only bigger banks. On Price-to-Book Value the sector is still far away from peak valuations. In case of corporate banks the potential earnings growth could mean valuations on future earnings is still not expensive. There is a case of valuations of banks to re-rate as RoEs of most banks is expected to improve in the next two years.
Q: Autos severely underperformed last year and are continuing to struggle this year. What is your outlook on the sector?
A: We are more positive on the four-wheeler space as the underperformance has been higher. After a disappointing FY19, we expect earnings growth of four-wheelers to improve in FY20. Currently, we are seeing volume de-growth in the four-wheeler space which could continue for few more months due to higher inventory levels.
However, after few months we could see volume growth coming back due to correction in inventory levels and a mean reversion in demand. The NBFC liquidity situation could also improve in the next few months.
This coupled with slightly lower interest rates should help increase auto loans. The risk-reward ratio is favourable for auto stocks (mainly four wheelers) and scope of making money is very high from current levels.
Q: Analysts believe earnings will be the next trigger once general elections are through. What are your expectations on Q4 and FY20 earnings?
A: We expect Q4 earnings to remain in line with expectation as nine months of the year have gone and analysts have revised their estimates accordingly after Q3 results.
For whole of FY19 & FY20, we expect Nifty earnings to grow 12 percent & 25 percent, respectively. Majority of the FY20E earnings growth in Nifty will be driven by the banking sector followed by automobiles, and oil & gas sector.
Q: What are the major global and domestic risks for the market after elections?A: The main factors that can play spoilsport and affect markets negatively are: 1) Formation of a weak third front led coalition government at the center 2) Lower GDP growth due to global slowdown, which could be a function of how the Global Trade war shapes up in the next few months 3) GST collection not coming up to budgeted numbers in FY20, which could put pressure on the Fiscal Deficit and bond yields - thereby impacting equity valuations 4) Disappointment in actual earnings growth versus projections, which could indirectly increase forward PE and impact markets negatively.