In the near-term, we have a cautious view on the broad PSU banks.
Our target is based on financial year ending (March). We have a base target of 33,000 for Sensex as on March 2018, which is a marginal return of 5 percent from the current level, Vinod Nair, Head of Research, Geojit Financial Services, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) After a sharp rally seen in the month of May, the market seems to be losing momentum so far in the month of June. Do you think we might have hit an intermediate top for the moment?
A) The market has rallied well in the last two quarters, and this month, it is taking a breather ahead of the roll out of GST on 1st July. We had seen some impact on the mid and small caps when the GST rate was finalised during May.
For some sectors and stocks, the rate was higher than the current level or marginally above expectation. We have already seen an immediate negative reaction of 6 percent to 8 percent while the final direction will depend on the actual implementation of a new era of indirect taxes.
Q) Top five stocks which could turn out to be multibaggers in the next 2-3 years and why?
GST is a game changer for organised logistics players as it will provide a boost to the warehousing and supply chain management business.
TCI will be a key beneficiary given its well-integrated network with a fleet of 9,000 trucks, 1.400 branch network, manages 5 ships and has warehousing space of 11mn sq ft.
BEL is the market leader in the defence electronics given its strong technological and execution capabilities. BEL will emerge as the key beneficiary due to its strong position in strategic defence electronics space and GoI focus on indigenization.
The current order backlog of Rs 40,000 crore is 5.3x FY17 sales, has significantly improved the earnings outlook.
Havells India is a leading player in electrical consumer goods and is expected to command premium valuation given strong revenue growth and healthy earnings outlook. The recent acquisition of Lloyd consumer business is expected to bring long-term scalability to its consumer business.
Ashok Leyland (AL)
Ashok Leyland which is the second largest commercial vehicle (CV) manufacturer in India will be a direct beneficiary of improvement in road infrastructure projects.
The management is focused on gaining market share in LCV from 15% to 30% over the next 2-3 years by launching new models. We expect the AL's revenue to grow at 14 percent CAGR over FY17-19E supported 11 percent volume growth.
Bharat Forge (BFL)
BFL is planning to scale up the new business from current 5 percent to 15 percent in the next 2 to 3 years. The orders from Boeing and new defence JV with AM General, SAAB, Rafael & IAI (Israel Aircraft Industry) will boost its presence in the field of air defence.
We expect 13 percent revenue CAGR over FY17-19E led by picking in US truck market and de-risking the utilisation in a Non-auto sector.
Q) The biggest fear for markets could be June quarter numbers as most experts feel that it could carry some burden of GST impact? What are your views? And, if that is the case, do you see markets to hovering in a tight range for the next two months?
A) Many of the market experts’ hope that GST could be a factor that could lead to some correction in the market. A correction, which can be inclined during the implementation of GST as many businesses (formal & informal), have a cautious view given lack of preparedness and knowledge.
Some industries have a view that they need some more time to understand and implement this new system while some have a view that rates are higher.
The true impact will be known only when the new procedure starts, it could have some hiccups in the supply chain, changes in inventory/revenue and inflationary impact.
And this could lead to volatility in quarterly results (June - Sept) and disturb the trajectory of future earnings story which is anticipated to expand from FY18.
The flaw regarding this anticipatory correction is that, it is well known, short-term disruptive but with improved outlook in the long-term with an anti-inflationary agenda to the retail index (CPI). We feel that it is unlikely to give a meaningful impact on the listed entities.
Q) Some of the global investment banks raised their target for Nifty for December 2017 but it is not that much which leaves limited room for upside. What is your call on the markets for year end and do you also have a specific target for Nifty or Sensex?
A) Well, our target is based on financial year ending (March). We have a base target of 33,000 for Sensex as on March 2018, which is a marginal return of 5 percent from the current level.
This target is based on one year forward P/E of 17.5x assuming that valuation will continue to be on the upper end led by earnings growth. We have a Sensex EPS CAGR of 15 percent for FY17-19.
Q) Fund managers reduced their weight in IT stocks in the month of May. Well, the trend has been declining from May 2016. The weight MF in IT sector in May 2016 was 9.7% to 6.8% in May 2017?
A) Domestic investors continue to be under a flux regarding the outlook of IT sector. This trend is likely to continue unless we have a structural improvement in the business outlook. Currently, the only factor which is attracting short-term investors are corporate actions undertaken by respective companies to maintain or support stock prices.
Q) Apart from theme Bharat or economy related theme, do you see any other theme dominating D-Street in the next 5 years?
A) Two sectors which could attract investors’ interest are chemicals and metals:
Domestic speciality chemical manufacturers are in investment mode to create new products and robust R&D with an eye to capture the gap in global markets supply. Higher sourcing from global chemical manufacturers and Make in India is supporting the trend.
The global steel markets recovered during FY17, registering better than estimated production and demand growth. Government’s emphasis on infrastructure development is expected to revive demand.
On the other hand, GST rate for steel has finalised at 18 percent compared to 19.5 percent, additionally, the benefit of lower tax rate of 5% on the major inputs used by them like coal and iron ore will benefit the sector.
Q) What is your call on OMCs?
A) The latest addition to ongoing reform in the sector was the implementation of daily revision of petrol and diesel prices with international crude prices. With dynamic pricing and greater autonomy, OMCs operational efficiency is expected to improve.
Additionally, it would help bring in greater transparency in pricing, remove pricing shocks to the consumer and help OMCs manage inventory and marketing margins. In the long-term, reform in the sector and higher investment plans to expand their refining & petrochemicals capacity augers well for the sector.
Q) What is your call on PSU banking stocks which are hogging limelight? Do you think it is a matter to rejoice or something to worry about? The proceeding could be long drawn process and the some of the PSU banks are functioning they might be eating into their own deposits?
A) In the near-term, we have a cautious view on the broad PSU banks. Recently, PSUBs have moved to limelight due to the high expectation of quicker resolution in NPA issue and mergers & consolidations. PSU banks continue to grapple with muted loan growth and no significant improvement in outlook.
Elevated NPAs continue to impact earnings growth with the risk of further write-offs. Valuation of PSU banks have increased over the last few months without any change in fundamentals. We feel that PSU banks do not offer a favourable risk reward at the current juncture.
Q) AUM for MFs dipped a little bit in the month of May but equity funds hogged the limelight. Do you think the trend is here to stay even though risk-to-reward ratio might not be favourable especially for investors investing directly into markets?
A) Awareness and benefits of investing through SIPs are well understood by the retail investors. This trend is likely to continue in the long-term as domestic investors are shifting from Physical assets like Cash, Gold and Real Estate.
Domestic inflows will be an important factor to define the premium of India market in the long-term. The recent moderation in AUM has more to do with the consolidation in the global market due to factors such as US FOMC rate hike and volatility during UK Election & Gulf Crisis.
Q) Is there a shorter way of filtering quality stocks something like 5-point check for investors who want to invest directly in equity markets?
A) Sector outlook is stable to positive.
• Has a well know exposure or a niche product in the respective sector.
• Historical or Recent 2-3 quarter earnings growth is encouraging,
• There is a good story in the medium to long-term
• If not all the 4 above, valuation is attractive on the historical basis or a turnaround in the making.Disclaimer: The views and investment tips expressed by the investment expert 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 decision.The Great Diwali Discount!
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