With the markets already at all-time high levels, DIPEN SHETH, head - institutional research at HDFC Securities tells Aprajita Sharma that the momentum is running high on a heady mix of expectations, especially around government policies and actions such as NPA resolution, GST and RERA. This, he says, will sustain if corporate earnings grow, going ahead. Edited excerpts:
Do you think the prevailing market valuations are overestimating the earnings rebound and we may see a reality check soon? Where do you see Sensex and Nifty headed in CY17?
It is not about overestimating the earnings rebound, as much as it is about assigning a high multiple in anticipation of an earnings rebound. The confidence on earnings rebounding is running so high that nobody is asking the question of what is a fair multiple. Some of it has got to do with lower interest rates in the system, higher financial savings and inflows into MFs, but somewhere along the line, the rational investor will ask for a risk premium to be built into equity valuations. Right now, there's no sign that this is happening or can happen soon, especially as flows and conviction in the India earnings rebound story are intact.
Already, sectors like banks, real estate and infra have run away in the hope that big changes are on the anvil after some big changes have already played out. Momentum is running high on a heady mix of expectations, especially around government policies and actions such as NPA resolution, GST and RERA. This will sustain if follow-through is strong and if earnings growth happens. So far, there is little to indicate it won't.
Name a few pockets where you still see potential gains in the short to medium term?
Monsoon sensitives may still yield gains if the monsoon is around normal levels as has been expected by the IMD. These include appliances, agri inputs and autos (esp 2W and 3W). If the dollar rebounds from close to two-year lows (it is down some 5.5% CYTD) you should see a rebound in IT and pharma.
If monsoon pans out the way IMD predicted, can we expect a boost to FMCG volumes? How good FMCG as a basket is valuation-wise?
Most FMCG companies are suffering from low volume growth. With a strong monsoon, rural incomes will rise and drive up volume growth. This will drive up earnings disproportionately as operating leverage plays out. However, much of this is built into the performance of our 12-company consumer universe over the next two years, with over 20% earnings CAGR.
Even on these numbers, FMCG and appliances companies are trading at a simple average of almost 34 times earnings. There is no room for error. However, it is true that at higher earnings (should they materialise), investors will be happy to buy them even in the mid 30s.
Do you see hope in the banking sector following the introduction of new NPA framework?
Do I have a choice?! Frankly, there have been so many different initiatives to solve the NPA problem that one is not sure which one should get the credit if it at all lands into positive territory. So far it hasn't and that is frustrating. The basic problem is that some large corporate loans have gone bad and there isn't a clear solution in terms of which instances are attributable to plain bad luck, poor appraisal skills, poor project execution skills, administrative and policy inadequacies of government, malafide intent of promoters or cronyism. A single solution is never going to work. However, a couple of tough decisions on pulling up some known devils would be exemplary. Just allowing haircuts won't solve the problem, even if it might release some deadwood.
The latest legislation enables the RBI to direct banks to move for bankruptcy, but I am not sure whether it will enable them to chase defaulters and squeeze them sufficiently to minimise losses to the banking system. As with all other things about this government, I remain hopeful of at least piecemeal progress in this matter. To their credit they have tried a number of approaches.
Are the present valuations of IT stocks attractive for fresh investors?
Valuations are attractive, but prospects are not exciting as IT businesses face attack from multiple fronts. For the last two decades and more, they have successfully thwarted all kinds of threats, but this time around, they are struggling with at least three structural issues - automation, cloud and VISA restrictions. Hopefully, the talent pool, balance sheet strength and tech innovation will help them overcome all the three. Right now, it's a faith-based call for me.