The Nifty might give you 15 percent return in the next one year, but there will be companies which will be multibaggers and investors need to focus on those companies, Sandeep Raina, Associate Director, Edelweiss Investment Research, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) Are you looking at a reformist budget or a populist budget from the Modi government?
A) It will always be a reformist budget. I don’t think they will ever get into populist kind of a stuff. Just to give you an example, we are also very clear that this government by 2018-2019 have to show numbers.
Right now, the numbers are not there but if I look at the capacity utilisation for the country it has picked up. We were at 64 or 65 percent capacity utilization which is now close to 75 percent which is very positive for the country and India Inc.
I think in one-one and a half year, the private capex will start kicking in. The government is also not leaving any stone unturned. Recently, they announced recap plan for PSU Bank of Rs 2.1 trillion. This money will be utilised first to take out all your bad assets and then it will go for growth.
I think the larger banks like Bank of India (BoI), State Bank of India (SBI) and also Bank of Baroda (BoB) will get into this zone of giving you credit. I am sure the government will make sure that from now on the NPA problem will not occur again.
If the economy has to do well, you still have to be dependent on these public sector banks at least for the next couple of years. This trend will change because the government has given a lot of money to them.
I think in the next one to one and a half years, we will see both private and public credit happening and you will see a revival in demand as well. Consumption demand is also showing signs of pick up. Hence, we could see 8-9 percent growth in near future.
It will further move up. So, I think the market will do very well over the next four-five years. We believe everyone should invest in the market because next three-four years look very interesting to us.
Q) You belong to the equity side and the budget is approaching. Let us say, you were the finance minister. From an equity point of view, any provisions or reforms that you want to put in or anything which could boost the appetite for equities?
A) Simplification on the tax front can be there that is the only endeavor that this government can do. Rest I think the focus on growth should be there. If you are able to give growth to the country everything just subsides.
The equity market is hungry for growth. They don't want anything else. They want clean growth, simple growth, and growth which can be projected - if that this government is able to give you and I don't think there will be a problem at all.
Q) We have already rallied by about 25-26 percent this year 2017 after a flat 2016. Do you think the performance will continue for 2018?
A) When we talk about the market we always look at Nifty. Although, this is a right way because you need a barometer to talk about which can reflect the country is doing well or not.
But, I will pardon myself to look at Nifty. I would rather look into sectors and then stocks. I will prefer that way. Now, a lot of people say that Nifty earnings are not good, they might be partially right.
If I calculate FY17 data, Nifty companies have grown at 12 percent, not in weighted average total Nifty companies. Let say there are 15 Nifty companies and the revenue growth was 12 percent odd.
We say it is a weak performance because your Nifty is trading at 18 times and how can you be at- so your PEG (price/earnings to growth ratio) becomes 1.5.
However, if I remove the sector which is not interesting. Let us say pharma is out, your telecom is out, your IT is out and your power is out - this number comes to around 33 percent of the weighted average.
Your balance has grown at 22 percent which is a healthy growth. Companies or sectors which are delivering numbers, the market is giving them higher valuation and that will be a trend going forward as well.
The Nifty might give you a 15 percent return in the next one year, but there will be companies which will be multibaggers. We need to focus on those companies.
Q) Any companies which are looking interesting at this point in time?
A) Housing looks very interesting to me and in fact, housing finance companies (HFCs) looks even more interesting because in last a month or a half I have seen 20-25 percent correction in these stocks.
Then building material companies look very interesting. If you are talking about housing then those products will be used. Cement is another sector which is looking very interesting.
In fact, we have great south companies like Dalmia Bharat. I think we should play Central India because Uttar Pradesh (UP) will go for re-development that is my belief, UP and Madhya Pradesh (MP), so we should play that kind of companies.
Q) So these are the sector where multibaggers will come from?
A) Yes, we are very focused on these kinds of this things. In finance also we are more inclined to NBFCs. In NBFCs, Ujjivan Financial Services is one stock which is looking very interesting to us.
Q) If we just step back and talk about valuations, there are doubts around small and midcaps? What are your views in terms of further investment or should investors take a step back in them?
A) Since we are talking about valuations and valuations are very tricky subject. Now for somebody 12 times PE will be expensive and for somebody 18x P/E will be not expensive.
To start with there are three-four things which we should look at when we talk about valuation – the function of growth which is a function of PEG, function of Return on capital employed (ROCE) etc.
Lot of times when the sector is not in favour, which means the growth rate doesn’t happen, market will also not give you the similar kind of PE. However, if the sector is in favour, your PE starts changing, so re-rating happens.
For example, the chemical is one sector which very interesting case. In the Chemical sector, many companies have shut down their operations in China which is now favouring Indian companies.
In China, with shutting down of factories might have impacted 5 percent capacity but that 5 percent is maybe 100 percent of India. That 5 percent is big enough for us to basically make a lot of money and that is what is happening in chemicals.
We have to identify those companies which are getting the benefit of a surge in demand. We are receiving a demand for that kind of chemicals which China is saying I don’t want to make because these might be hazardous.
Because the scale is so high, India is saying we will get it done, we are making it and then so these companies are making a lot of money. There are companies like NOCIL or stock like that so they are getting because China is closing down.
Q) Any list of stocks that you would like to recommend?
A) I like Birla Corp because I am liking cement. I like Ujjivan because I think that company is transforming then I also like Can Fin Homes. In the housing finance, I like GIC Housing – again it has dropped significantly 30 percent from the top.
In construction, we like Dilip Buildcon and PNC. I am liking these sectors and top companies of these sectors. They are looking very interesting. I like Motherson Sumi and Bharat Forge also because I think they are doing very well globally there is huge market for them.
For Motherson Sumi the threat of electric vehicles is also not there because it is making those bumpers which will be used in electric vehicles as well so all that is looking very interesting.
Q) So these are more of a wealth creating an idea or we can put them in a multibagger tag?
A) I will tell you the smallcaps would be the category of a multi-baggers. Motherson Sumi can’t be a multi-baggers because the market cap is already Rs 40,000-50,000 crore or maybe more. That will be a good wealth story. Bharat Forge is also a good wealth story but a company like a Can Fin Home it is a multibagger.
GIC is a multi-bagger, Birla Corp is a multi-bagger, Ujjivan Financial Services is a multi-bagger like that.
NOTE: I will put a caveat also a lot of stocks will be having with me and my clients as well.
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