Mukherjee said there is an opportunity to make 50 percent in many of the beaten down stocks even if the stock prices don’t rise all the way till their earlier highs.
The rebound in the prices of midcap and small cap stocks has boosted overall sentiment in the last couple of weeks, Udayan Mukherjee, consulting editor, CNBC-TV18, said in an interview to Moneycontrol editor Santosh Nair.
“Some of the quarterly earnings for small and midcaps have been quite good. The stocks had fallen 30-40 percent and the scene was ripe for a recovery,” Mukherjee said, attributing the broad-based rally in the market to a combination of technical and fundamental factors.
He said the Nifty has been one of the better performers among emerging markets over the last one month. The relative strength in the index is drawing in opportunistic money from foreign investors. The factor behind the rise in foreign fund flows into Indian equities is the weakness in the Chinese stock market.
“China is down 35 percent in dollar terms, 24-25 percent in absolute terms; the yuan is down 10 percent. So some money is shifting away from China into other markets,” said Mukherjee.
On RBI’s decision to hike interest rates, he said the market’s reaction to it was “confident.”
“It could be the classic bull market climbing walls of worry; but in a sense, the market is drawing comfort from the fact that RBI will not let inflation go out of control,” he said.
At the same time, rising interest rates spell bad news for earnings recovery, particularly for small and mid-sized companies.
“This (hike in interest rates) was not entirely unexpected as bond yields had already risen. But this would take a bit off the earnings recovery. Already, margin pressures are building up. If interest rates go up, Nifty earnings estimates for FY19 and FY20 will have to be relooked at,” he said.
“But the market seems to be going with the view that we are coming to the end of the rate hike cycle. At most, there could be one more 25 basis point-hike before the end of this year,” Mukherjee said.
On the rebound in the midcap shares, Mukherjee said: “HNIs (high net-worth individuals) have figured out that some of the midcaps have fallen so much that in the event of a recovery, there is a great trading potential in these stocks.”
He cited the instance of Venky’s, which fell from Rs 4500 to Rs 1900 and then rallied to Rs 3000-3500. Shares of some shrimp farming companies too rose sharply from their recent lows after announcing a decent set of quarterly numbers.
Mukherjee said there is an opportunity to make 50 percent in many of the beaten down stocks even if the stock prices don’t rise all the way to their earlier highs.
On the first quarter earnings season, Mukherjee the aggregate earnings of Nifty companies was a disappointment.
“But at a granular level, the numbers are much better compared to those for the March quarter,” he said, adding that outside of Nifty companies, there were clear signs of an earnings recovery.
On HDFC AMC which listed today, Mukherjee said, for now, the market would assume that the good times in the mutual fund industry would continue forever.
“We may have many more quarters of this kind of secular growth because the market (for mutual funds) is so under-penetrated.
“But this is a cyclical business; it will have its ups and downs. The asset management theme is an excellent theme in the long term. So one would have to pay a premium to own them today, but a better time to accumulate would be when there is a depressed phase in the market,” he said.
On the rebound in ITC shares, he said it was a valuation catch-up happening with other consumer stocks, as ITC’s valuations had been depressed for quite some time now.
Mukherjee said ITC shares could rise another 8-10 percent from here, but other consumption themes like electrical, footwear and paints offered better upside than tobacco.
“ITC can grow at 9-10 percent a year, but other consumption themes can grow at 20-25 percent a year,” he said.
Mukherjee feels investors would be better off avoiding Jet Airways shares despite the steep correction recently.
“Aviation per se is a difficult space, as exemplified in the stock price of its leader IndiGo. Long-term wealth is not being created here. In my view, aviation is a trading sector. You should buy when crude prices are low and load factor is high. The moment crude prices start to rise or something else starts going wrong, say competitive intensity, you should sell,” he said.
“Aviation stocks are not wealth creators and Jet has the worst balance sheet. It has a market cap of Rs 3500 crore and debt of Rs 9000 crore, and no free cash flow. Even if the promoter were to sell his 50 percent stake it, would fetch no more than a couple of thousand crore,” he said.He said the stock could give a short term bounce because the stock had fallen from Rs 800 to Rs 300, but there was no long term investment theme there.