By Sandeep Raina
The year 2017 has given ample reasons for the investor community to rejoice as the market reached unprecedented levels. Earnings finally saw some recovery with the temporary impact of disruptions like the goods & services tax (GST) and Demonetisation cooling off.
Having said this, the current scenario in the Indian equity markets may prima-facie look overvalued and puzzling. To give more perspective into this, Nifty is currently trading at ~21x trailing P/E as compared to our 10-year average P/E of 18.4x (due to low earnings).
So does this mean, the current market is overvalued and should be stayed away from?
Let’s take some cue from historical precedence of other markets. From the year 1979 to 1990, Japan’s Nikkei had a single way rally from 5000 levels to 35,000 levels when economy transitioned from a USD 1 trillion economy to USD 3.5 trillion economy.
We think this is relevant because when an economy enters a high growth period it is generally coupled with long-term rallies in the stock markets with valuations adjusting for the long-term high growth period.
Thus, our thinking on where the markets and stock valuations can be and should be is far more myopic.
The year 2018, would be a year of corporate earnings. After the dismal performance of the corporate earnings, we would see earnings growth in the major sectors like Infrastructure, Consumption, Metals, and Banking etc.
“Know what you own, and know why you own it.” – Peter Lynch
Every investor is scouting for novel and multibagger stock ideas. In times where information is easily available and more stocks are well researched it is difficult to find stock ideas which can be 5-6 times.
However, the strength of the business, its capital efficiency, quality of the management, business moats and valuation would be the key to finding out such stocks.
We at Edelweiss Investment Research, spend a lot of time in understanding each of these. Also, more importantly, we rely on companies with simpler and predictable business models than fancy business models.
The next wave of growth- Building India
In the year 2018 and onwards, the relevance of housing as a driver for the next wave of economic growth cannot be undermined. Housing and real estate contribute about 8 percent to the GDP currently and 50 percent to the Gross Fixed Capital Formation (GFCF).
There are significant demand as well as supply-side levers for the housing industry in form of low mortgage rates, increasing wages, higher affordability and government’s impetus on providing “housing for all”.
We believe this will translate to 15 percent CAGR in the sector for the next 4-5 years. Therefore, we believe “Building India” to be the next emerging theme for value investing.
Building India as a broad theme encompasses sectors like - Housing Finance, Cement, Home Building Materials.
Housing Finance:
A sustainable low-interest rate regime and low mortgage penetration (penetration as a percentage of GDP at paltry 9%) are a few potent macro factors driving underlying housing credit demand.
The sector is likely to benefit the most as they are specialists at operating lower down the pyramid versus banks, which tend to focus on higher ticket size and salaried clients.
Our top picks include names like Can Fin Homes, PNB Housing, GIC Housing Finance.
Cement sector:
The government’s renewed focus on construction and affordable housing is envisaged to drive 7.5% demand CAGR over FY17-25 and catapult utilization to 90% in FY25 from 67% currently. This, in turn, will propel the industry’s realization and profitability.
Our top picks include names like Birla Corporation, Sanghi Cement, and Sagar Cement.
Home Building Materials space:
The share of building materials (excluding cement) is estimated to jump to Rs3.8tn by FY21 from Rs2.5tn currently. In each home building materials segment, the share of the unorganised segment is more than 50 percent (in some cases even 70%).
Additionally, the reduction in GST rates from 28 percent to 18 percent is anticipated to accelerate demand shift.
Our top picks include names like Asian Granito, Century Ply, Everest Industries and Shankara Building Products.
We wish you a very happy and prosperous 2019 with Nifty touching new highs. We expect Nifty EPS of FY18/19/20 to be 500/600/720 and expect it to scale 12,000 in FY19.
Disclaimer: The author is Associate Director, Edelweiss investment Research. The views and investment tips expressed by investment experts on moneycontrol.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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