You are going to face an election in 2019. Before that, first off the block will be Karnataka and three other states, Madhya Pradesh, Chhattisgarh, Rajasthan, etc. and the most dangerous thing is in three of these states and the incumbency could be a big factor said Sreesankar Radhakrishnan
The market will reflect a lot from what is happening on the global side. Globally, changes expected in terms of strong growth, especially US, and interest rates rising. The dollar, normally, could be stronger, but if you look at it, it is not happening, Sreesankar Radhakrishnan, Co-Head Equities, Institutional Equities, Prabhudas Lilladher told Moneycontrol’s Sunil Shankar Matkar and Uttaresh Venkateshwaran. Edited excerpt:
We are seeing escalating trade war tensions, and earlier last month 10,000 was also broken on the Nifty. How is the market expected to perform going forward?
The market will reflect a lot from what is happening in the global side. Globally, changes expected in terms of strong growth, especially US and so you expect rates to rise. The dollar, normally, could be stronger, but if you look at it, it is not happening.
All over, there has essentially been a loose monetary policy for quite some time. Now it is expected that it will start getting tightened. There is a possibility that everybody will start to protect their own markets, economy and as a consequence this year could be huge in terms of volatility.
Second, you are actually seeing tightening which will further happen in the US. Look at the non-farm payroll numbers for the last year. It was unexpected. February’s numbers are getting revised upwards. So that is telling you that the economy there in the US is doing so strongly... Now, in this bargain, when the tightening starts to happen, the biggest casualty is your contracting market PE. So you need to budget in for that risk.
So, then what are you expecting from this market? More correction ahead…
It is possible. We look at the market's Nifty's ten year chart of one year forward earnings. The market has always rendered an average of 17 times earnings in the last ten years. (When the Nifty was) At 10,360 last, it was at 18.5 which means that market was still high, at a higher level than a 10-year average.
The market has the potential to go to 9,600 or even lower to probably come to that 17x one year forward multiples. Then if the market starts to see a higher tightening, which will happen probably, then the chances of its contraction also you cannot completely be ruled out.
Something that you also need to watch out is next year is the earnings estimate is at Rs 573 for the Nifty as against Rs 478 in FY18. 43 percent is the growth expect in banking and financial services. That is because this year you are expecting more provisions. It could pull down profits. So then the P/E actually does not come down, it will only go up. So, we need to be mindful of the fact that there are potential events up there.
Another thing is that the third quarter FY18 was probably the first quarter in many quarters. I have seen the growth of profits has been better for the base effect. Earnings growth in Q4 also could be bumper. It could be beat the expectations of many as well.
Now what does it mean for the GDP. 5.7 percent in the first quarter, 6.3 in the second quarter, 7 percent in the third quarter, fourth quarter 7.5 plus could be the number which comes. Maybe the base was low, thanks to demand. So the feedback from a lot of corporates is better.
…So I do not see a need to be bearish on a macro front right now except some segments may not see a faster growth. Our analyst is not very optimistic on cement growing at a fast pace.
We have seen what happened to PSU banks. Is more stress seen in Q4 or in FY19 as well?
We are seeing 4-5 parameters being sacrosanct in the banking space. Underwriting skills have to be good, you need to have a very good liability franchise that you come and put your money. You need to focus on maximising your ROA. You should be able to raise your capital as and when you require. Do PSU banks score in any one of these parameters? If not, then they have a problem, except SBI. It the largest bank with 20 percent share kind of scenario. Now, they have their own issues. But that is still one of the PSU banks where I have been more confident. It has got really better management.
I do not think it is a single short answer. For them to start doing very well, your incremental underwriting has to be improved and your management bandwidth needs to be increased. I do not think that in the near term, this is possible. I think it will be trading stocks according to me.
What is the risk to Indian market? There’s political uncertainty too, right?
Political risk is pretty high. You are going to face an election in 2019. Before that, first off the block will be Karnataka and three other states, Madhya Pradesh, Chhattisgarh, Rajasthan, etc. and the most dangerous thing is in three of these states and the incumbency could be a big factor. But in my view, this challenge is like all these things cannot remain like this over a longer period of time. That is the political challenge. So, the bigger risk that I see to the market is global cues.
How does crude fit into the picture?
Last time when crude went to these USD 100 a barrel plus, etc. your credit growth in the system was very high. To serve these ridiculous kind of prices in commodities apart from crude, a country like India will have a problem because you have fiscal deficit and balanced rate deficit will go which means your currency also was ruled by news, etc… The market will find a way to handle it. That is what my gut feel is, but it could be a surprise package for everybody as well.
Midcaps have had a great run last year…
Some of the stocks have got a lot of froth. That should get reduced.
How should an investor in midcaps play it?
It is very difficult to play midcaps on the shorter term. The problem is there are midcaps where many of them will have large volumes. So the impact cost is quite huge.
US Federal Reserve is talking about three hikes this year…
I do not think anybody can go with preconceived notions that I will hike the rate three times at 25 basis points each or four times at 25 basis points each. You need to look at the market conditions and the challenges that you face and where you want to be. So even if you look at RBI's credit policy, every time they speak about their inflation targets, your policy is revolving around managing the monetary stance that they have.
Is there a pecking order to preferred stocks and sectors?
A: I still like financials and we have gone stock specific rather than sector and we like financials private sector banks for sure.
What is your target for the Nifty?
A: Right now our index target is 9,600 on downside to 10,500 on upside.
Could you elaborate on your top picks?
A:. Our top picks include HDFC Bank, ITC, Hindustan Unilever, Maruti, SBI, Larsen and Toubro, ICICI Bank, Axis Bank, IOC, Yes Bank, Tata Steel, Britannia, Hindalco, Mahindra, Petronet LNG, Aurobindo Pharma. This is not the pecking order. We take it from our coverage risks only, rough. Navneet was thought of our top picks earlier. It went to Rs 180 plus. We exited from top picks. It is back to Rs 130 right now. Fundamental business remains the same. Choose companies which has got that fundamental strength.