In the recent past, most of the mid and small cap index or stocks have seen sharp cuts of more than 10 percent, while even after those cuts we still believe valuations of those stocks are still highs and even charts of those stocks also suggest still some more downside is due in them, says JK Jain, Head of Equity Research at Karvy Stock Broking.
We expect largecap indices or stocks are more likely to outperform their mid and smallcap peers in the year 2018 and investors can look at adding more stocks on declines, JK Jain, Head of Equity Research at Karvy Stock Broking said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) The S&P BSE Sensex tuned negative for the year 2018 earlier this week and it looks like tables have turned in favour of bears. What is your assessment of the market at current juncture?
A) Over the last one month, the inability of the Nifty50 to cross the key resistance zone of 10600 -10650 and its sustenance below all major short-term moving averages confirms the view of advantage bears from a short to medium-term perspective.
The sluggish inflows into equities by domestic participants, non-stop selling by foreign institutional investors (FII’s) on Indian stocks and the recent action in derivatives by foreign players also support our bearish view on the market.
The weakening of macros like the rise in the dollar, uptick in inflation, long-term capital gains tax hangover, and a spike in bond yields are making us (India) less attractive on the global space and the same is witnessed by our underperformance against our global peers for the month of February.
Going forward, though we are likely to stay in a broad range of 10200 to 10600 for the near term; however, looking at the magnitude and velocity of price action over last 4 to 5 days making us to believe that there is a high probability of moving below 10250-10200 zone and a decline towards 9800-9850 is more likely for a medium-term perspective.
For now, the unfilled gaps in Nifty and the multiple tops zone of 10550-10650 is likely to act as key resistances.
Q) What are the signals you are getting from US Fed? Do you think the upcoming policy meet in March could signals what we could expect for the rest of the year?
A) The recent US macroeconomic data which is released over last few weeks be it inflation, non-farm payrolls, PMI Numbers, and jobless claims signals the pickup of the US economy at much rapid pace than expected and even the US Fed confirms the same.
The US Central Bank is now getting prepared to hike rates at least 3 times this year which is making equities as an asset class to lose its sheen.
Even on the domestic front, as most of the domestic triggers are behind us and we believe that most of the recently buzzed events are into the price and going forward, we are more likely to tune to the global equity markets movements.
However, changing dynamics in micro economics is likely to trigger more sectors specific or theme based or stock specific activity from a medium-term perspective.
Q) What should be the right strategy for investors right now – sit on cash and wait for a dip or deploy cash incrementally throughout the year?
A) In the recent past, most of the mid and small cap index or stocks have seen sharp cuts of more than 10 percent, while even after those cuts we still believe valuations of those stocks are still highs and even charts of those stocks also suggest still some more downside is due in them.
However, rather than taking a broader index call for the year, we expect this year largecap indices or stocks are more likely to outperform their mid and smallcap peers; hence participants with deep pockets may look to deploy cash into stocks which have delivered decent numbers in the recent quarters with a provision to add more on further declines.
Q) What is your advise to investors who want to put Rs10 Lakh into markets? He is in the age bracket of 35-40 years. He/she is looking at forming a portfolio with direct equities, MFs, a part of fixed income as well?
A) For all those who missed riding the rally during the CY 2017, it is a golden opportunity to build a strong equity driven portfolio and one can start investing in the equity markets now onwards.
The market has witnessed a corrective move from lifetime highs, which is a normal phenomenon in bull markets hence such opportunities must be used as a blessing in disguise by those who missed the bus earlier.
On a broader picture structurally, there is no doubt we have already entered into growth orbit and nothing has changed drastically on the Indian economy front on the long-term indicators front.
In fact, the GDP data is favourable, the BJP government’s foothold is getting stronger day by day etc. are positives in itself, but the markets are feeling the burden of developments happening back in the USA for near term.
At the current juncture, investment in a lump sum may not be the best idea, however, buying into quality stocks in tranches could bring about the best value in one's portfolio over a period of time.
Though the age group 35-40 seems a middle-aged range when it comes to working lifespan, it is relatively a decent age to invest because usually investment cycle for any professional would begin from the age of 25.
Hence the exposure to direct equity should also ideally be around 45-50% while the rest could be spread across other avenues of investments.
A mixture of flagship mutual funds schemes from different segments like LARGECAP, MIDCAP, BALANCED and MULTICAP funds, which have delivered in the past must be a part of one’s portfolio.
Not neglecting the fixed income part, one must allocate a sufficient amount of money to this part of the overall portfolio, depending on one’s financial goals and his risk profile.
Q) What should be the ideal strategy for investors in terms of sectors? Do you think PSU banks are a good buy at current levels? What are the sector which you think are likely to show momentum in the year 2018?
A) The association of Indian IT companies are expecting a strong growth in the fiscal year 2019 as most of the companies are able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.
Even the tailwind of weakness in rupee against the dollar over last few weeks is also likely to add to their top line numbers. Hence select largecap and midcap IT stocks have much more potential to outperform in the coming quarters.
With the pace of US FDA clearing the issues and selective Pharma companies who managed to survive in the recent turmoil may also perform significantly for the current year.
Most of the managements of the consumer goods companies are giving a positive outlook for near-term and consumption as a theme may be looked by participants for the coming months.
Infrastructure companies with strong balance sheets and low debt can also be looked upon after government put more thrust on Infrastructure development.
The PSU Banking space has recently been in the news for all the wrong reasons with the exposure of scams after scams.
With the NIFTYPSUBA index down by more than 18% YTD, we still expect the current pessimism among PSU Banks to continue in the short term and suggest avoiding fresh entry from this space in PSU Banks with higher NPA’s, for the time being.
However, the only PSU BANK which is likely to have a promising future is State Bank of India, Indian Bank. However, from a long-term perspective, Private sector banks with retail focussed are more likely to outperform their corporate lending peers.
Q) Any top contra buys which investors can look at for the next 2-3 years (with rationale)?
A) Here is a list of top contra buy ideas:
Visaka’s brown-field expansion project to increase the fiber board capacities by 40% is expected to improve the profitability margins owing to reduced lead time.
Also, Visaka is planning to increase its non-asbestos revenue contribution to ~50% levels from the current 33 percent in next couple of years, which further adds to revenue with mitigated regulatory risk.
Visaka has launched an innovative solar roofing product, ATUM- a new age eco-friendly, energy efficient and energy generating roof and we expect a good amount of traction from industrial roofing segment for the product. We believe ATUM would become an upside catalyst in years to come.In view of EPS growing at a CAGR of 25% mainly due to an anticipated EBITDA expansion of 290 bps & a revenue growth of 8% CAGR during FY17-20E, we recommend a target price of Rs. 900 next 9-12 months perspective.
Bharat Electronics Ltd (BEL):
BEL enjoys revenue market share of 40%-45% of defence electronics spends and the current book offers revenue coverage of over ~4.7x. We estimate an inflow of ~Rs.120bn-130bn annually for next two years.
We believe execution momentum to pick-up going forward on a full year basis and expect in next two years BEL to record revenue CAGR of ~15% to Rs. 133bn and earnings CAGR of 18% to Rs.9.
We believe the recent correction is overdone and offers good entry opportunity. We maintain ‘Buy’ rating valuing BEL at 21x FY20E EPS of Rs.9 for a target price of Rs.189 for next 9-12 months perspective
Q) What will happen in the banking space given the fact that the cost of borrowing is inching higher. The RBI might keep rates on hold in its next policy but may raise rates in 2018?
A) Though the inflation for the month of Jan has cooled off, but over the last few months, we have seen an uptick in the inflation which in turn is making the bond yields to spike.
We also expect the RBI to maintain its tighter policy stance in the next policy view also; however, it is more likely to raise rates in the first or second quarter of FY 19.
Though RBI has stated that the uptick in inflation is within its range and the hawkish tone in its recent policy has made most of the banks to raise their MCLR.
Banks are compelled to raise deposit rates so that they can get more funds. At the same time, a deposit rate hike is typically followed by a rise in lending rate. Over last three years, though RBI has reduced its rates, but banks have not passed that significantly.
Spike in our domestic bond yields are likely to be less steep than compared with the international bond yields and hence Banks with significant domestic loan book are likely to get a lesser impact on the net interest margins. The recent uptick in bond yields is more likely to negatively impact the net interest margins and mostly the mark to market losses of PSU Banks.
However, on a long-term basis, Private lenders who have improved their growth capital by selling stakes in subsidiaries, who have the ability to raise funds through current and savings accounts or raised money through private placements are likely to gain more when compared with their peers in PSU space.
Especially the banks with more focus on retail lending than on corporate lending will see their margin improving even in the rising interest rate scenario.
Q) With Dollar gaining strength there is a higher possibility of rupee weakness. Which sectors are stocks likely to benefit the most? What is your target level for the currency?
A) In the case of dollar strengthening further from current levels, IT and Pharma companies which have huge international exposure are likely to benefit at their top line level.
Especially the IT companies which have managed to transform their business model are likely to benefit more from the transformed technological developments and at the same time, Pharma companies which have got the product and plant clearances from the American and European medical regulators are likely to benefit more.
On the currency level front, though over last one year we have managed to outperform significantly over other emerging currencies, and if from here on any further depreciation of Rupee may take it towards the all-time lows zone of 66.50-67.50.
