Telecom could emerge as dark horse in Samvat 2074; Private banks, NBFCs to do well

Rahul Shah

The year gone by – Samvat 2073 – was rewarding for equity investors. It has been Diwali time for most of the global investors.

All the global markets are at a record high; volatility is at a record low; inflation is yet to rear its head while the global growth seems to be improving in a synchronized fashion right from the US to Eurozone, to China shrugging off concerns over weak earnings growth, the market put up a smart show.

From last Diwali, the Sensex has gained 16 percent, while the Nifty 50 is up 18 percent — buoyed by the gush of domestic fund flows.

We believe that the worst is behind us and expect GDP growth to recover, albeit gradually. Recent high-frequency indicators like PMI and our own proprietary EAI for July and August point towards the same various parameters such as credit growth, capex cycle, earnings growth and capacity utilization are close to their cyclical lows.

Going forward, as capacity utilization improves and credit cycle picks up, earnings too will catch up.

Over the next two years, corporate earnings are likely to see a rebound, given that the transient effects of various reforms will completely play out.

We also don’t find any indications of stress on the central government's budgeted tax receipts. While non-tax receipts are likely to be lower than estimated, there is still a good chance that it could be made up by higher-than-budgeted tax collection.

Indirect tax receipts up to August 2017 were 39.5 percent of full-year budget estimates (BE), marking the highest collection in the first five months in any fiscal year (barring FY08) since FY01.

We now estimate Nifty EPS at Rs 491 for FY18 (15.9 percent) and Rs 605 for FY19 (23.2 percent). The Nifty trades at a P/E of 20.4x on FY18E earnings based on current composition.

However, based on FY19E earnings, Nifty P/E will be at 16.5x In India, healthcare stocks underperformed through the last year (index down 18 percent) though they seem to have formed a bottom in the middle of August.

IT stocks did nothing through the year. It was a superlative year for commodities (metals, basic materials, oil & gas), realty and consumer durables stocks.

It was a year of discovery of smallcap stocks as many of them rose sharply due to rerating to catch up on valuation difference, restructuring and other measures adopted by the promoters.

Auto, metals could continue to do well; telecom could be a dark horse while financials has done very well, but we believe that momentum would continue in private financial banks and select good NBFC.

In the coming Samvat, insurance stocks could remain in demand as investors grapple with the right way to value them (and the multiple thereof) in an economy like India. We believe equity will reward handsomely for investors' going ahead.

(Disclaimer: The author is VP-Equity Advisory, Motilal Oswal Securities. The views and investment tips expressed by investment expert 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.)