We continue to believe that largecaps are the space we should invest in currently with higher exposure than in mid and smallcaps, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.
For the portfoio allocation, we are suggesting a mix of 82.5% for largecaps and 17.5% for mid & Smallcap, he said. Edited excerpt:
Q) The D-Street looks slightly nervous ahead of the interim Budget as we have already seen bouts of volatility. How do you see markets in 2019?
A) Uncertainties in the domestic and the global economy refrained the market to start on a positive note. Concerns developed like farm loan waivers and cut in GST rates, such populist measures may exert pressure on India’s fiscal and quality of upcoming policies.
The revenue from GST has been below par and a further cut in GST rate will have a modest impact on the fiscal slippage, in totality, such measures can ruin the fiscal position & government spending.
Additionally, Indian economy has slowed down impacting expectation on coming Q3 & Q4 results, with the risk of a downgrade in earnings.
The vote on account may not have important implication for the market, which will move as the developments of the upcoming domestic and global market.
Q) What is your call on small & midcaps for 2019? How one should choose the right kind of stock for investment?
A) We continue to believe that largecaps are the space we should invest in currently with higher exposure than in mid and smallcaps. This, largely given the undergoing risk mentioned in the near-term though valuation has reduced.
Currently, we are suggesting a mix of 82.5% for large-caps while 17.5% for mid & smallcap, which can be increased in the future as risk subsides.
This portfolio can focus more on stable domestic stories with leadership qualities in industries like consumption, IT, chemicals and export-oriented companies. Value buying stocks in Pharma, NBFCs, Cement & Infra should also be added.
Q) Any top five stocks that you are recommending to clients for a period of more than 1 year?
A) Here is a list of top five stocks with a holding period of more than 1 year:
Aarti Industries (ARTO) is a global leader in Benzene based derivative products. ARTO’s ability to adopt latest technology, cost competitiveness, economies of scale and ability to meet the stringent & customized specifications of the varied customers helped to gain strategic supplier tag from its clients.
We are constructive on ARTO gave capacity additions, the launch of new products, and robust off-take from Speciality and Pharma segment. We expect earnings to grow by 29 percent CAGR over FY18-20E.
InterGlobal Aviation (Indigo) is one of the most efficient low-cost carriers (LCC) with a market share of about 40 percent in the Indian aviation sector.
Indigo passenger traffic grew by a robust 31 percent CAGR versus industry growth of 15 percent CAGR, over FY14-FY18. Going forward, expanding market presence through fleet addition and firming up its regional connectivity plans augurs well.
Indigo’s fleet comprises of 15 percent more fuel efficient models which will cushion its margins and market share even at times of higher oil prices. We remain constructive on Indigo gave RoE of ~40 percent, efficient operations, and strong balance sheet.
Escorts is the third largest agricultural tractor manufacturer in India with an overall market share of 11 percent as on FY18. We believe that the long term fundamentals of the tractor industry are solid.
Though in the near-term the pace of central and the state government’s policy may slowdown due to elections and fiscal shortage.
But, we expect the status-quo on the Governments fiscal discipline in the long-term and 25 percent earnings CAGR over FY18-20E, inducing confidence in the stock.
HDFC Bank is the second largest private sector bank in India. We are structurally positive on HDFC Bank given its top-notch asset quality, robust retail franchise and strong balance sheet growth.
Further, with the bank’s superior liquidity positioning (liquidity coverage ratio of ~118 percent as compared to 90 percent required), the bank would benefit from the credit squeeze to NBFCs and consolidation of PSU Banks.
Besides, we expect the bank to maintain superior return ratios with RoE of 18 percent and RoA of ~2 percent over FY18-20E. As a result, HDFC bank will continue to enjoy premium valuation within the banking space.
UPL is the leading manufacturer of crop protection products. We expect EBITDA / PAT to grow at a strong CAGR of 24/31% over FY18-20E led by backward integration & shift in product mix towards biologics.
Continuous improvement in global market share of UPL will further facilitate the growth momentum. The recent acquisition of Arysta life Science will create significant strategic value for UPL in the long run.
Q) Given that Brent is trading around $55 to a barrel, what is your call on OMCs and aviation stocks?
A) OMCs are underperforming in recent times as government has asked them to forgo a portion of their marketing margins in October as Brent crude prices hit high of $86.7/barrel, but since then it has dropped by 33 percent but OMCs continue to be underperforming due to expectation of weak earnings in the near term and general elections.
Going ahead re-rating of the sector largely depends on the policy adopted by the new government post elections. In the near term, we remain neutral on this sector.
We are bullish on this sector due to strong traffic growth 15% CAGR over FY14-FY18 but we remain stock selective. A sharp fall in oil prices has led ATF prices to cut by 15% which will benefit this sector.
We remain bullish on InterGlobal Aviation Ltd (Indigo) due to expanding market share, robust passenger traffic growth, more fuel-efficient fleets, and strong balance sheet.
Q) One big worry for equity markets is global growth. Are we heading for growth slowdown in the US in 2019, or a possible recession?
A) The global market has got bizarre, the US market has corrected by about 15 percent from the 52-week high, having a domino-effect in the emerging market (EMs). This fall is the biggest seen in the last 5 years, completely reversing gains of 2018 and last 1.5yrs.
The MSCI-EM is down by 25 percent while Nifty-50 is down by 8 percent from 52-week highs. The factors impacting global market are a likely adverse effect of US-China trade war, US political drama & Trump’s interventions, a slowdown in global & US economy and Brexit.
This slowdown is more cyclical led by a change in policies, the risk of recession looks very limited and in the overall economy is still doing well.
Q) If the global economy is slowing down, do you think India will be able to sustain its growth, especially with general elections scheduled for first half of 2019?
A) Cleary India is outperforming today given positive vibes led by structural reforms to perform in the long-term. Earnings growth for FY20 will get better by H2FY20 led by positive lag-effect of reforms (like GST, IBC, NPA restructure), the subdued growth of the last 3 years due to the disruptive effect of a bunch of reforms.
India’s fiscal position is much better today, while a long-term negative view on oil prices will have a further impetus on the country’s macro situation. Food inflation has been brought under control by the government led by reforms & measures in the rural economy.
This will lead to lower consumer inflation improving RBI’s stance from ‘calibrated tightening’ to ‘positive’, leading to an interest rate cut in the future.
Q) Retail investors have remained loyal to investing in equities via SIP despite wild gyrations in 2018. Do you think the number could fall if the volatility increase?
A) Till now volatility has not impacted SIP investment strategy to a great extent. It is a newly found lucrative method to create wealth in the long-term, which is likely to be maintained in the future.
But, a very adverse increase in risk will impact retail investment in the mutual fund, in which the higher impact will be for lump sum investment. For example, increased risk in global market and recession.
Q) Enormous wealth has already been created in the history. The Sensex has grown like 100x in 32 years, at 15 percent CAGR. Do you think, 2019 will also give us a similar opportunity to enter and remain invested for a long time to create wealth?
A) The volatility from the election is likely to be over by the mid of 2019. Elections have never impacted the long-term trend of the economy and market.
Currently, Government & RBI are working on the weak banking situation, hope is that the scenario will better in the short-term with improved liquidity in the economy. The world economy hopes that the truce between the US & China will develop stronger, and an agreement will save the world economy.
A dovish view by Federal Reserve in Dec-2018 and reduction in the pace of interest rate hike in 2019 will help the emerging markets like India as funds increase from FIIs.
Q) What are your views on public sector banks after the recent RBI report suggested that the headwinds in terms of NPA mess could be abating?
A) The Gross NPA of all Scheduled Commercial Banks is coming down, while in the case of PSBs, the projected GNPA will lower marginally only. As far as investors are considered, even though marginal, it is definitely a positive sign.
But, in terms of provisioning, PSBs coverage is halfway mark which will continue to impact performance in the short-term. With PSBs being under PCA, consolidation, and decline in credit and deposits growth, we have a conservative view on the PSBs.
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