Vinod Nair of Geojit Financial believes that Q4 numbers have been good for the broad economy.
Sectors like pharma, IT and telecom are consolidating but beneficiaries like Banks, FMCG and Infrastructure are extending the bull rally, Vinod Nair Head of Research, Geojit Financial Services, said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) What is your call on markets right now? It looks like geopolitical concerns and earnings back home are keeping bulls at bay?
A) Currently, we have a cautious view due to high valuation, high expectation for FY18 earnings growth and consolidation in the global financial market due to increase in risk. In spite of these concerns, the market is rolling higher into new high due to strong liquidity from MFs and FIIs.
Sectors like pharma, IT and telecom are consolidating but beneficiaries like Banks, FMCG and Infrastructure are extending the bull rally.
Developed market is hovering with some volatility led by political uncertainty over US President's ability to deliver its reform promises and interference in a federal investigation, but the overall positive trend has been maintained.
The domestic market expectation for FY18 is very strong led by exponential earnings growth and benefit from the implementation of GST. The fourth quarter result has been good providing chance of this trend to continue.
A case of caution is that market is expecting more than 20 percent earnings growth in FY18 compared to muted FY17 (Bloomberg), creating a risk of a setback in the future.
The Sensex is currently valued at a 1-year forward P/E of about 18x. But given strong retail inflows, Mutual Funds are likely to use every dip as an opportunity to invest in equity.
In the case of FIIs, the inflows will depend on the next course of action in the US, which is anticipating strong growth in the economy led by next reform and low cost of funds, FOMC has a cautious view regarding the pace of US rate hike, which is positive for EMs.
Q) Any top five stocks you think could well turn out to be multibaggers in the next 2-3 years?
Implementation of Goods & Services Tax (GST) will be a game changing event for businesses in general and for organised logistics players. It will provide a boost to warehousing, supply chain management and third-party logistic players (3PL) business.
Lesser border checks/paperwork would lead to faster movement of trucks; Transit times and cost is expected to shrink by 20-30%. Further, GST will lead to consolidation of warehouses and outsourcing of warehousing services to third party logistic players.
Transport Corporation of India Ltd (TCI) will be one of key beneficiary from the implementation of GST given its well-integrated network with a fleet of 9000 trucks, 1400 branch network, manages 5 ships and has warehousing space of 11mn sq ft.
Bharat Electronics (BEL) has market leadership in defence electronics given its strong execution capabilities, technological tie-ups with a higher focus on R&D. BEL is a debt free & a cash rich company with a strong order book with of Rs 33,806 crore which is 4.7x FY16 sales, providing strong revenue visibility for next 4 years.
Further, BEL will be a major beneficiary of GoI higher focus on Make in India and higher indigenous procurement. GoI plans to bring down import dependence to 30% from current 60%.
Further, under the new defence procurement policy, a new category called Buy Indian (Indigenously Designed, Developed and Manufactured – IDDM) was introduced, having the highest priority in procurement which will provide higher opportunities for domestic players and improve domestic R&D investments.
Higher than expected GST rate in consumer discretionary may give some impact on volume due to likely price hike post the GST rolled out. However, being a leading player in electrical consumer goods and the recent acquisition of Lloyd consumer business is expected to bring long-term scalability to HAVL’s consumer business.
We expect revenue & PAT to grow at healthy 14% & 17% CAGR over FY17-FY19E. Given strong revenue growth and healthy earnings outlook, HAVL is expected to portray a long-term story in the consumer goods segment.
Ashok Leyland (AL) is the second largest commercial vehicle (CV) manufacturer in India will be direct beneficiary led by improvement in the road infrastructure projects. AL is the largest supplier of logistic vehicles to Indian Army (5% of revenue), will see higher traction from the new defence procurement policy.
AL's 100% Acquisition on its 3 JV with Nissan Corporation of the LCV business will give positive impetus for the business and also allow using the Nissan technology on a 1% royalty basis for 5 years.
Management is focused on gaining market share in LCV from 15% to 30% over next 2-3 years by launching new models in FY18. We expect the AL's revenue to grow at 14% CAGR over FY17-19E by factoring 12% volume growth in our estimate for the same period.
Bharat Forge (BFL) is planning to scale up the new business from current 5% to 15% in the next 2 to 3 years. The orders from Boeing and new defence JV with AM General will provide higher revenue visibility in the non auto sector during FY18.
BFL has also entered into JVs with SAAB, Rafael & IAI (Israel Aircraft Industry) which will boost its presence in the field of air defence. Government mandatory for in-house sourcing for ‘Make in India’ projects will benefit Bharat Forge, in the long run, to build up order book.
Upcoming BS6 emission norms can aid a sharp increase in content per vehicle due to increase in the engine components parts in car and Truck segment. We expect 13% revenue CAGR over FY17-19E led by picking in US truck market and de-risking the utilization in Non-auto sector
Q) How are you reading RBI’s guidelines on banking sector regarding NPA? Do you think banking sector is trading at frothy valuations? What should investors do?
A) The market is anticipating that the proposed NPA resolution will bring a long lasting solution to the country's NPA issue. More leeway will be given to RBI for direct intervention in NPA resolution of banks.
This will remove the uncertainty pertaining over the fate of the accumulated NPA in banks book and add more stability to the sector outlook. RBI’s had broadly outlaid the action plan to tackle NPAs issue (released on 22nd may).
But, given the wide nature of the report, it failed to provide clarity on the resolution of outstanding NPA. One concern which may be hoarding the market is that how much quantum of haircut banks will have to take to make this resolution effective, leading to some selling pressure on PSU banks.
But, Government is moving in the right direction to strengthen the PSU banks space by favouring a merger of weaker small banks into much larger banks. This will strengthen PSU banking with fewer but stronger banks. Larger PSU banks will have significant benefits from synergies and scope of activity.
Regarding valuation, we know that it is high compared to historical trend. The current re-rating in valuation is in anticipation of reforms for NPA resolution, the uptrend in business from FY18 and possibility of a reversal in RBI policy stance.
Please do note that though the valuation is high it has not reached the all-time high of one year forward P/B. Hence, even if the prices are high but not completely in terms of valuation.
Given the encouraging outlook for banking and Indian economy, the valuation can expand further. As a rational investor, we suggest investors be watchful and convert the dip either through external or internal factor as an opportunity to add their exposure in the banking sector.
Q) March quarter season has been a mixed bag for D-Street? Do you think the trend will continue and we could see some correction on the back of high expectations of earnings growth?
A) We believe that Q4 numbers for the main indexes (like Sensex) way be mixed but for the broad economy, it has been very good. For example, BSE-100 has given a PAT growth of more than 30 percent on a YoY basis led by Metals, Chemicals, Infrastructure and Energy. The fourth quarter has come as a good one on a YoY basis after a gap of about two years.
This is providing more weight to the market's expectation of a reversal in earnings growth in FY18. The risk is that currently, the market expects more than 20 percent growth in earnings compared to sub single digit growth in FY17.
Implementation of GST can impact the flow of business in the near-term. At the same time, we should also acknowledge the fact that GST will be a big beneficiary to the listed entities in the long-term. The trend of profitability is likely to be maintained in the future unless global factor changes.
The question is whether its YoY growth will be as good anticipated by the market or sub below to conclude whether the valuation is high or fair. This question is very difficult to be answered perfectly today, whereas the trend in the long-term is intact but at premium prices.
Q) What are your contra buys (sector or stocks) in the year 2017 and why?
A) Three sectors which can be considered as a contrary view are:
PSU banks have not seen a major improvement in asset quality and business growth continued to remain muted in Q4FY17. Concerns prevail over the quantum of haircuts PSUBs will have to absorb in their balance sheet from the proposed NPA resolution policies.
If the new framework proves to bring a sustainable solution to the NPA in the Indian banking sector, it could improve the risk profile of PSUBs and result in a re-rating in valuation.
Further, PSUBs are transforming into better-disciplined management, while government’s focus on strengthening the PSU banks through mergers and meeting the capital adequacy improves the business outlook in a reviving economic environment.
The current valuation and discount to private peers, therefore, provides a favourable risk-reward ratio. Additionally, Government is moving in the right direction to strengthen the PSU banks space by favouring a merger of weaker small banks into much larger banks.
The revised PCA (Prompt Corrective Action) regulatory framework is expected to trigger the next phase of consolidation in the PSUB space. There will be fewer, but stronger banks and large PSU banks will benefit from synergies and scope of activity.
SBI and Bank of Baroda are our top picks in the space
The industry valuations (1Yr fwd) are at high on the expectation of revival in demand supported by GoI’s enhanced focus on infra and affordable housing. In spite of high valuation, we still have a positive outlook on cement due to the fact that the realisation should see an improvement going forward.
Realisations will improve on account of improvement in capacity utilisation as the demand-supply gap is likely to narrow down given the reduced pace of capacity additions over FY17-18E.
Further, the cost efficiency initiatives of the companies will fetch the added benefits on profitability. Additionally, the declining trend of interest rates will give a fillip to the housing sector which accounts for ~67% of total cement demand.
The IT sector is witnessing a structural change and is planning to recovery from a new framework of business. The current headwinds are a delay in the US new visa immigration policy and lower spending by the international customers.
Other headwinds are lower penetration of the Indian IT companies in the emerging digital and artificial intelligence and a stronger rupee. As a remedy, the Indian IT companies are heavily investing in the digital platform, which is currently growing at 30 percent on a YoY basis in revenue as per the latest quarterly result.
Indian IT spending is likely to rise from $270B today to $1trllion by 2024. We maintain our contrarian view in the IT space with a long-term view due to its quick adaptability to the new digital business and advantage of lower valuation.
Q) The latest minutes from the RBI suggests that instead of a rate cut, the rate hike could be a possibility. Do you agree? If yes, what could be its implication on market?
A) The last RBI policy minutes conclude its view as per the then available data and upcoming unknown issue like the future impact of Demonetisation, GST and caution over monsoon and its implication on food inflation.
But recent data act like a shot in the arm, retail inflation has collapsed to 3 percent in April compared to 3.8 percent in March. RBI was working on an inflation rate of 4 percent for FY18, the start to the year has been good and the outlook is anticipating further consolidation in retail inflation at least in the near term due to cut in food prices.
Economists expect inflation to inch higher to 5 percent by March-2018 due to the reversal of demonetisation effect over the long-term. But, currently, the market is taking it as a positive action in anticipation of good monsoon which will ease inflation further.
Additionally, Government is working in such a way that GST rates will further cut the food prices. This has to be factored by RBI and can change its stance from neutral to accommodative in the medium-term.
Q) What is your one advice to investors inspired from your guru?
A) The market is the true guru of its own which cannot be completely explained by any Voyager due to known and unknown's factor. For example, even after spending years or decade in the equity market experts find it difficult to decide whether we are in a bull or bear market, when did it start or when it will end.
Yesterday's defensive capital creates have become today's wealth destroyer or vice versa. In all this unknown’s one thing is for sure, that equity is the best asset with a good return in the long-term.
The only way to explore the benefit is to keep it simple and excels in long-term. For passive investors, the best way to benefit from the ever-changing and competitive business world is through equity SIP.
While for active retail investors be updated on research outputs and invest in companies which have built and grown their brands with healthy historical parameters. Work with a portfolio method which is not over diversified.To outperform the benchmark you need to identify sectors for which outlook is changing or improving led by demand-supply scenario (domestic or global market), technology changes or regulatory factors. Accordingly, you will have to get in or out of the stocks or sectors. Keeping emotions away from the investment is always advisable.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .