If earnings do not come through we may see a larger correction otherwise we rise in earnings will make markets look reasonable again.
If earnings do not come through we may see a larger correction; Otherwise, rise in earnings will make markets look reasonable again, Devarsh Vakil, Head – Advisory (Private Client Group), HDFC Securities, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Excerpt:
Q. Markets @ fresh record highs! What is your call on markets for the rest of 2017? Are we likely to end 2017 with gains over 20 percent compared to a flat 2016?
A. We are of the opinion that Nifty is likely to end the calendar year 2017 with more than 25 percent gain for the year.
It is our thesis that FY19 and FY20 earnings will grow at 20 percent CAGR. The Nifty may post EPS of Rs 693 for FY20, based on 15x earnings. If numbers fructify, market doesn’t look that expensive.
If earnings do not come through we may see a larger correction; otherwise, rise in earnings will make markets look reasonable again.
Q. The mid & smallcap are also hitting record highs in line with benchmark indices? Is the rally likely to continue or investors are better off booking profits?
A. We do not recommend booking profits across the board. Strategy differs from stock to stock. Overall, there has been a re-rating of the small cap and midcap space, and now the valuation gap has disappeared.
So, tactically, one should reduce exposure to small and midcaps, and keep 20 percent of the money earmarked for these stocks into cash.
Q. Bank recapitalisation – a smart move by the govt? Do you think it reverses fortunes of public sector banks and could also lead to an upgrade by global rating agencies?
A. The package will help public sector banks accelerate provisioning for stressed assets, speed up the bad loan resolution process and support the clean-up of the balance sheet.
It is a decisive package to restore the health of the Indian banking system and a monumental step forward in safeguarding the country’s economic future.
Global rating agencies are terrible behind the curve when it comes to India’s ratings, it is high time they catch-up with realities on the ground. India’s government has much more assets at its disposable which can substantially reduce the debt if desired.
Q. Post the recapitalisation – we saw money moving to PSU banks which are highly under-owned as private and NBFC stocks corrected while PSU stocks rallied. Do you think the trend will continue?
A. PSU Banks are highly under-owned. As far as impact to private banks and NBFC are concerned, PSU banks will provide them some competition post-recapitalisation move.
But, Private Companies who have their own strategies in place, will not be impacted much on the back of the recapitalisation of PSUs move.
Q. Two sectors which you think could emerge as a dark horse in the next 1-2 years and why?
A. Insurance (BFSI): India being largely under-penetrated in the insurance segment, provides brighter future prospects. Travel Tourism and Leisure: Rising Middle class and disposable income provide great visibility for the sector.
Q. Recent data suggests that fund managers have started paring their position from stocks which have already more than doubled investors’ wealth in 2017? Is it a smart move and retail investors should also start doing that with respect to their portfolio?
A. We cannot generalise. As long as earnings are growing there is enough visibility, no need to book profits. If you feel the company has reached peak earnings and the valuations are really stretched, one must book profits and look for better opportunities.
Q. Any top five under-owned stocks which you think could generate wealth over the next 3-5 years?
A. Texmaco Rail, HCG, PTC Financials, Tata Chemicals
Q. How are earnings panning out in the September quarter? Do you think earnings will be back in double digits?
A. Out of 400 odd companies that declared the result, sales grew 10 percent year-on-year (YoY) and profit grew by over 4 percent. Moreover, most of the companies will declare results in the next 15 days so we will have to wait and see.
However, early numbers show that results are better than expected considering the impact on GST, so if the trend continues overall results season is likely to be better than expected.
The Nifty earnings are expected to post 18 percent CAGR over FY17-20E and for FY20, it may post EPS of Rs693, based upon that 15x earnings. Based on this thesis, the market doesn’t look expensive as such.
