We believe that 2HFY18 will see markets trading in a range with high volatility, says Hemang Jani, Head - Advisory, Sharekhan.
The second half of FY18 will see a lot of challenges for the market with regards to geopolitical tensions, uncertainty on the domestic macroeconomic front, and strong economic vibes emanating from the US, Hemang Jani, Head, Advisory, Sharekhan said in an exclusive interview with Kshitij Anand of Moneycontrol.
The 1HFY18 is over and the S&P BSE Sensex rose just over 6 percent and for the year it has gained a little over 18 percent. Where do you see the markets headed in the next 6 months of this fiscal year?
The 1HFY18 was historical as Nifty touched the 10,000 mark in July 2017. The first half of the financial year was almost on expected lines.
But, the second half will see a lot of challenges for the market with regards to geopolitical tensions, uncertainty on the domestic macroeconomic front, and strong economic vibes emanating from the US which could turn the flow of capital away from emerging markets. We believe that 2HFY18 will see markets trading in a range with high volatility.
Your list of top five stocks which could turn multibaggers in the next 2-3 years?
Top five stocks which could turn multibaggers include stocks like Hindustan Unilever, Petronet LNG, Maruti Suzuki, NBCC & Reliance Industries Ltd.
In Q1FY2018, Hindustan Unilever Limited’s (HUL) revenue and PAT grew by 5 percent on a YoY basis and 15 percent on a YoY basis, respectively, beating Street’s expectations for the quarter.
Sharekhan has already revised their earning estimates upwards for FY18 and FY19 by 2 percent and 3 percent, respectively, to factor in better-than-expected operating performance.
The company is banking on operating efficiencies through various initiatives and cost-saving activities at the supply-chain/distribution level to see a gradual improvement in OPM.
Petronet LNG (PLNG)
Rebound in LNG imports and shutdown of Dabhol LNG terminal during the monsoon to improve PLNG’s Dahej terminal utilization in Q2FY18. Sharekhan expects PLNG to be a key beneficiary of the rising share of LNG imports in India’s overall gas consumption due to the following factors:
1) Flat to a marginal increase in the domestic gas production outlook over FY18E-FY20E and, 2) Low competition in LNG market as only two new LNG terminals - 5mmt Mundra terminal and 5mmt Ennore terminal is expected to come on-stream over FY18E-FY20E.
The stock is trading at an attractive valuation of 14.9x FY19E EPS given the strong earnings growth outlook (15 percent CAGR over FY17-2019E) and resilient RoE of 22-23 percent.
Maruti Suzuki India (Maruti) is India’s largest passenger vehicle (PV) manufacturer with a strong 47 percent market share. Over the past two years, the company has been able to gain market share due to new product launches, a vast distribution network (with an increased focus on rural markets) and a shift in consumer preference to petrol models from diesel models.
Maruti has successfully established itself in the big car category (Ciaz, Vitara Brezza, Dzire, and Baleno), led by strong product features and success of its premium distribution network Nexa, which offers a unique buying experience. Maruti continues to remain our top bet in the automotive space, given the sustained trend of outpacing the PV industry’s growth.
Sharekhan expects Reliance Industries's (RIL) GRM to remain strong at USD 11.5/12.0 per bbl in FY18/FY19, given the robust global oil demand growth outlook for 2017 at 1.5mbpd (International Energy Agency estimate).
Moreover, a likely improvement in diesel cracks would help RIL to maintain a premium of USD 4bbl-5/ bbl over Singapore Complex GRM. Ethylene margin is also expected to remain firm at USD 600-650/mt, led by healthy demand and likely delay in the commissioning of incremental capacities in CY2018.
It expects EBITDA/PAT CAGR of 23 percent/12 percent over FY17-FY19E, driven by the commissioning of core downstream projects in FY18. Any positive surprise in terms of better-than-expected financials of the telecom business would be an important re-rating trigger for RIL going forward.
Sharekhan marginally tweaked its earnings estimates on account of strong order inflow guidance and margin expansion despite flat topline in Q1. NBCC is likely to deliver an earnings CAGR of 51 percent during FY17-FY19E.
The positive outlook on revenue guidance for the next two years is on account of revenue booking to kick-start from large projects of Nauroji Nagar, Netaji Nagar, and Sarojini Nagar. Backed by strong earnings visibility, a lean balance sheet, high return ratios and its quasi-monopoly position.
Slipping macros is something which is troubling market participants at the current juncture. Do you think this will cap the upside for Indian markets or are these fears unfounded?
If the slipping macros do not see signs of improvement especially with regards to taxation reforms (GST) then markets will have strong reasons to correct till things are well in place for the next leg of up-move.
What is your call on the rupee? Do you see it heading towards Rs 70/USD in near term?
If domestic macro factors do not improve and the US keeps its pace of improvement on the economic front, then we can see some migration of capital or fund flows from India and other emerging markets (EMs), which can result in high demand for US dollars resulting in the currency (rupee) touching the mentioned levels.
September quarter earnings will kick off from the next month. Do you expect a recovery in earnings in this quarter?
We expect certain pockets to do well this quarter. E.g. metals, auto, private banks. Till date, there are no strong hints of broader economic activity pick up; hence, there are reasons to believe that broader earnings will continue to remain subdued and below par.
What is pushing foreign investors away from Indian markets? They have sold over Rs 20,000 crore in Indian equity markets in September (provisional).
As mentioned above deteriorating domestic macro factors and no revival of earnings are driving the FIIs into other markets. This trend may continue in the near-term.
Top sectors which will lead the next leg of the rally on India markets?
Financials, automobiles, consumer discretionary & rural franchise.(Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.)