Rahul Chadha of Mirae Asset Global Investments expects earnings growth of 15-18 percent in the next 12 months, which could propel the market further up. According to him a stable government at the centre has improved the overall economic sentiment.
He thinks geopolitical risks leading to spike in crude prices is the only risk for our market at this point of time.Stock specific, the house would stay away from companies that have balance sheet issues. Look for companies with rich management, good cash flows and sustainable business models, says Chadha.
Below is the transcript of Rahul Chadha's interview with Latha Venkatesh & Ekta Batra on CNBC-TV18.Latha: What is the pace of the Nifty in the days to come? There were experts earlier on in the days who said they see 9,000 by Budget that is end February, another six months. What is your take? What is the trajectory in the next six months or the next 12 months?A: India stands out as a clear outperformer amongst the select economies in region. As we see around the region we have got economies in Korea, Taiwan which are constrained by slow domestic demand, weak demographics, weak exports. China has got its own set of issues where they need to tackle this.So India stands out because under investment is always an easier problem to solve and with the stable government in place that improves the sentiment, improves the decision making. It is tough to put a number to it but safe to assume that we have got large part of the rerating over. I think market returns would be inline with the earnings growth which is anywhere between 15-18 percent for the next 12 months.
Ekta: We were having debate earlier this morning where one of the experts said that there could be around 10,000 on the Nifty by 2015 Budget. Do you think that’s possible maybe 9,000 to 10,000? What would your estimate be?A: These things would be contingent on couple of measures coming from the government. What we have seen is a cyclical recovery and that was bound to come because inflation is down, we have seen some bit of clearances come from the previous UPA regime. You got to give some credit to them that in the last six-nine months they tried to put the house in order and businesses were waiting for the stable government and as it happen, we saw things getting kick started. However, if one sees any resolution on goods and service tax (GST) from the current government, should one see auctioning of coal blocks because somewhere if the market ignored what happened a week back with the Supreme Court ruling; so should we see government coming up with coal blocks with all the pre clearances and those being awarded to companies and kick starting the investment growth in the economy and some bit of a resolution on the gas pricing issue then what you said is fairly achievable. But what we have to see is that market is just now trading only the cyclical recovery but six months later people would ask some of the seriousness in making to happen from the government.Latha: There are some who also caution that the next couple of months could be a period of consolidation. Is it possible that there is a deep correction or a big consolidation before the year is out?A: Deep correction is unlikely because it is a cyclical recovery from medium-term perspective. Also India is an attractive market economy from demographics perspective. You can see a deep correction, if we have the Russian situation go out of hand, if we see crude prices spiking by USD 20 per barrel from current levels, so it looks unlikely. I think what happens is the market takes a breather, you see more time for correction because it is difficult to find value in the market. We saw most sectors are not trading at fair valuation from FY16 perspective. So what you need to see is cyclical recovery playing through earnings upgrade across most stocks for market to move up.Ekta: Which would be the biggest risk that we could see for our market at this point according to you? Would it be geopolitical?A: Geopolitical leading to a spike in crude prices would be one risk, which comes to mind. Outside that not many risk come to the mind, so that would be the only one, if you are looking forward then three-six month perspective.
Latha: I want to ask you about the midcap space. Today, it is running at twice the pace that the Sensex and the Nifty have run. Would you think that that is what we should expect in terms of returns from the right midcaps? Would it be a multiple of what you will get from Sensex, Nifty companies?A: It is a function of quality of midcaps we are buying into because these midcaps as we have seen over the last five years would become multibagger. So, it is very important to identify right management, right segments that have the scalability and as you see that happening, these midcaps would get rerated because typically in a bear market these midcaps are trading at five-seven times earnings, as the bull market comes market invariably takes them up. Latha: What are the right business segments even if you will not talk to us about the right managements, which would be the right business segment? Is it real estate, for instance at this point in time Unitech is up 8.5, Indiabulls Real Estate is up 5.5? Would it be things like real estate in the midcaps, would it be auto ancillaries?A: I think what investors got to look at is business models which have sustained, which are generating cash flows and which is where auto ancillaries maybe an interesting opportunity from medium-term perspective. In sectors like auto ancillaries or pharmaceuticals, you have got a strong domestic demand plus, you have an upside coming from export recovery or order flows from OEMs outside the country. Therefore, that is one segment.Then some of these consumer durables or consumer discretionary plays can be interesting, and also some of the internet names though they are expensive can be interesting but one should look at the right valuation there. So, one has to look at the opportunity, also certainly travel and tourism. Therefore, one has to look at the opportunity that how the consumer basket is going to shift over the next three-five years and which are good companies to capitalise on. Ekta: You would even choose them if they were fundamentally weak, they had a high debt problem. Would that be something that you would consider strongly before you invest into the them or would you just play for a possible recovery in the fundamental going into the latter half of the year?A: We have seen companies with stretched balance sheets not do well because what would do well is more of an operating leverage rather than financial leverage. You would be wary of companies having too much debt on balance sheets and market has been smart in last three months post election in discerning between good businesses and bad businesses.
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