The medium-term story of India has not changed and is reasonably intact in that it is one of the fastest growing large economies in the world.
The medium-term story of India has not changed and is reasonably intact. It is one of the fastest growing large economies in the world. The market should really go up another 14-15 percent through the course of the year, Sumit Bilgaiyan, the founder of Equity99 said in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpt:
After losing 10 percent from record highs, the market has been rangebound for quite some time. Do you think it is fairly valued now or there could be more downside in the short term?
Well, in 2017, the markets have seen a stellar rally making one of the best years for equity participants. Since the beginning of the year we have witnessed a drawdowns of 10 percent or thereabouts. One must also consider the global backdrop especially a new US Fed Chairperson who seems a bit more hawkish than his predecessors, apart from that there is a rise in protectionist rhetoric led by the USA and an upward bias to crude and commodities given the recovery in global growth. When measured against all of this, the medium-term story of India has not changed and is reasonably intact in that it is one of the fastest growing large economies in the world.
What is your March 2019 target for the Nifty and how much returns do you expect in the next 12 months?
Our target is 11,500 for Nifty by March 2019 but let us put this thing in context. You started 2017 with a growth recovery and I am talking about the global macro right now. The real great thing that has happened in the last six months is that growth seems to be accelerating across the world. Look at the Indian PMI figures which has reached a three-year high. We need to realise that the bond yields have just started moving. This is nothing short of an extended goldilocks scenario. Second, let us keep in mind that after a lot of years, we are looking at double digit earnings growth rate for the next four or six quarters. I would say that this is a sweet spot and market should really go up another 14-15 percent through the course of the year.
Do the earnings and economic growth expectations justify current market valuations?
There have been earnings disappointments in India over the past few years. Now, there is an expectation that there will be a bit of a recovery. In the December quarter, we actually saw earnings coming more or less in line and there were no major downgrades. We are building in 20 percent plus earnings growth for FY19. Our expectation for next year is that there will be a decent recovery in financials. Retail banks have actually been doing well, but the corporate heavy bank — that is where the stress has been. In FY19 we will see a little bit of easing on the credit costs side, which will give you a better earnings growth. If you actually get that kind of earnings growth coming through, then that premium can be justified.
Have political risks been fully priced in or will they continue to be a cause for concern? Do you think some market participants are just overemphasising on political uncertainties to create buying opportunities?
If you look at a series of political developments over the last few weeks have placed the ruling Bharatiya Janata Party (BJP) on the back foot: its key ally has left the coalition and is attempting to introduce a no-confidence motion against the government. The immediate political threat is trivial as the BJP coalition still has a majority in the lower house. However, a ‘Grand Coalition’ of opposition parties to challenge the BJP in the general election seems likely which is something already weighing on Indian markets apart from weak global cues.
What is your opinion on the ongoing trade war? What are the biggest risks for India on the global front apart from trade war?
Well, of course, it is alarming situation about the effect that a major destabilisation of trade would have on across nations or businesses. But my sense is only smaller, export-focused countries stood to lose while countries with large domestic economies can easily withstand tariff threats. Now coming to India, even if tariff walls went up, India's large market and relatively swift growth would force multinationals who wanted a piece of that growth to manufacture locally. Plus, India could still benefit from global networks, importing innovation, cash and resources without having to do the hard cost-cutting required to increase competitiveness, then sure, India can stand tall in a trade war.
Earnings for Q4FY18 will kick off in second week of April. What are your earnings expectation for Q4 and FY19?
There have been earnings disappointments in India over the past few years. Post demonetisation and GST impacting growth in H1, we expect execution ramp up to continue in Q4FY18. We estimate 20 percent plus earnings growth for FY19. We are projecting a decent recovery in financials in FY19. Retail banks have actually been doing well, but the corporate heavy bank — that is where the stress has been. In FY19 we will see a little bit of easing on the credit costs side, which will give you a better earnings growth. We expect around 20 percent earnings growth in FY19.
What is your view on NPA problems faced by banks right now, and when do you see the issues ending? Is it a good time to invest in PSU or private banks?
For PSU banks, I would say that they are never a good investment because of one - their NPAs and second - management issues they face. Thus, NPAs problems faced by banks, coupled with bank frauds & serious management issues, would take 3-4 years, may be, to be sorted out. As far as private banks are concerned, I would recommend only looking at large banks like HDFC Bank, Kotak Bank, etc. They are still good investments and have potential to give good returns in long run. Thus, stay away from PSU banks as of now.
What is your opinion on defensive sectors such as IT and Pharma? Have they bottomed out?
I believe Pharma sector is still facing issues related to US FDA norms. Some good companies like Lupin, Sun Pharma, Divi’s Laboratories and others are continuously been scrutinized by USFDA. I believe for entire Pharma sector to be complied by the US FDA norms, it would reasonably take 1-2 years more. So right time to invest in Pharma sector would be when entire industry is standardized. Growth will pick up but not anytime soon. Thus I won’t recommend too much exposure in Pharma sector but if one wants to make a contrarian bet, can have at least one Pharma stock in their portfolio which is more complied and with lesser warning letters from US FDA.As far as IT companies are concerned, I strongly believe that midcap IT companies are outperforming large cap IT companies. Because many Large-cap companies are facing management issues, have too much exposure to US markets & there is no much growth left for them. Also we have witnessed large cap IT companies tend to do buy-back a lot. Rather I would recommend one can bet on recently listed IT companies as they have great growth potential left.
The worst in the IT space is over. However, new deals are coming with a little slower pace and the gradual improvement in the overall western world is resulting into the release of higher amount of orders from some of the larger companies. These companies are now releasing the subject business in the area of cloud computing and artificial intelligence. That is where we are seeing some of the Indian IT companies standing a good chance and they have started gaining the orders.
In pharmaceuticals, most of the companies are having a good amount of generic pipeline and that is important. The transition from a pure generic to specialized products will change the entire ballgame.
FY2018-19, I think it is quite a predictable financial year for many of the pharma companies where growth is coming back and particularly when I think in last two years, USFDA related issues have affected the sales of some of the companies. On a lower base, this growth would be seen higher in FY18-19. That is why we have started seeing the accumulation into the pharma basket in the fund portfolio.
What are the 5 stocks for FY19 that you think could turn multibaggers?
Investment Rationales-
1. Strong recovery: After a massive impact on business due to demonetization and GST, the company has reported a strong recovery both in enterprise and consumer business. After four quarters of consistent negative performance, net revenue grew by 18 percent YoY to Rs. 64 Cr supported by 19 percent growth in new license sales. Enterprise business (23 percent of overall revenue Q3FY18) grew by whopping 37 percent YoY backed by 22 percent growth in volumes and 12 percent YoY growth in realizations.
2. Market leadership in consumer security segment: Quick heal has achieved market leadership in consumer security segment through it’s across the value chain product portfolio and extensive distribution network and is replicating the model to get success in the enterprise security space.
3. Underlying Strength of the business remains intact: Quick Heal was delivering disappointing set of performance over the last four quarters. But, most of the de-growth happened because of macro factors, like demonetization and GST implementation rather than business related issues. We believe, underlying strength of the business remains strong which is visible in higher license sales in the retail business and strong growth in the enterprise business.
Investment Rationales-
1. Carbon Products spreads on an uptrend: Despite fall in volumes (-9.2 percent YoY, -10.0 percent QoQ), Carbon Products EBITDA/tonne grew to Rs 8,426 (+125.6 percent YoY, +11.8 percent QoQ). Segment EBTIDA grew to Rs6.4 bn (+104.1 percent YoY, +1.2 percent QoQ) despite weak volumes. Volumes which were impacted by delayed shipment are likely to recover in Q1CY18.
2. Call highlights: Rain is witnessing strong demand in CPC and CTP & aims to maintain Carbon Product spreads achieved in Q4CY17. Savings in interest likely to be USD 25-30 Mn p.a. due to refinancing. Since Rain has fixed rate bonds, there interest rates will not be impacted by higher rates in the US in CY18.
3. Improved outlook: CPC and CTP demand has continued to improve in the last six months which is also evident from Carbon Products margin improvement during 2HCY17. We reasonably expect high EBITDA number on rising demand/ constrained supplies.
Investment Rationales-
1. Pioneer in field of Logistics: ABC India is amongst one of the first organized cargo Transporters in India incepted 49 years ago. ABC India is full service logistics provider across all states nationally and across all modes including Road, Rail, Sea, River and Air. Its 49 years of logistics experience combined with the latest web based technologies, 100+ location branch network, global forwarding alliances and continuous quality improvement systems, come together to provide effective solutions to every transportation need.
2. Entered Turnaround phase: After consistent negative performance quarters, ABC India, in Q2FY18, reported Net Profit of Rs. 1.15 Cr and EPS of Rs.2.12. Logistics sector is thriving supported by recent GST norms. Company is expected to give huge growth numbers going forward as barged single order worth Rs. 142 Cr from BHEL in its bucket.
3. Huge Asset base: ABC India’s tangible & non-tangible assets include Warehousing Space stretched more than 2 lacs sq.mt, Web Based ERP connecting all hubs and branches, Heavy Lift Equipment- 168 Hydraulic Axles including 60 Goldhofers & 17Movers, Trucks andTrailers-210 Own plus access to fleet of 1500+ along with IATA/FIATA and MTO registration for all international movements.
Investment Rationales-
1. Pioneer of complete automotive solutions: Omax Auto Ltd, incorporated in 1983, is a member of Munjal group of companies. Over the years, the Omax group has not only multiplied its manufacturing and engineering capabilities in a big way, but also taken a giant leap in the highly dynamic international market. Omax is amongst top three companies in sheet metal and tubular segment and is having the largest Sprocket manufacturing capacity in South East Asia.
2. Excellent Clientele: Omax Auto is having a very broad customer base and supplies their products to Maruti Udyog, Hero Honda, Escorts Bharat seats and other leading manufacturers of automobile industry. The company has also started supplying to SRF Nippon Denro Carrier Aircon and Eisher Mitsubishi on regular basis.
3. Improved financial performance: Omax EBITDA surged 65.03 percent QoQ/ 457.11 percent YoY at Rs. 22.64 Cr in Q3FY18, owing majorly to improved top line and controlled operating costs and other expenses. Omax has shown commendable recovery from past 4 quarters, Net profits whopped 506.68 percent YoY at Rs. 12.49 Cr in Q3FY18. With auto sector gearing up, we only foresee extraordinary performance going forward.
Investment Rationales-
1. Software Product Company with industry analyst recognition : Incorporated in 1992, Newgen Software Technologies Limited (NSTL) is a software product company providing a platform that enables organizations to rapidly develop powerful applications addressing their strategic business needs. It has been recognized by Gartner, the world's leading information technology research and advisory company, in their Magic Quadrant research. It has also been recognized by Forrester, which is one of the most influential research and advisory firms in the world, in their Wave TM research.
2. Diversified revenue streams from multiple geographies with low customer concentration: NSTL’s customer base includes 17 Global Fortune 500 companies. Out of which 98 new customers were added in FY 17. NSTL’s 450+ active customers are spread over 60 countries. It has offices in the US, Canada, the United Kingdom, Singapore, and Dubai. NSTL gets recurring and non-recurring repeat revenues from long standing customer relationships.
3. Focused on driving innovation through in-house R&D: As on the date of RHP, NSTL had 4 patents registered in India and 28 outstanding patent applications in India and 2 outstanding patent applications in the US. Also it has registered a total of 12 trademarks in India under various classes and had 5 pending trademark applications for registration in India, and registered 5 copyrights in India. As of September 30, 2017, its in-house R&D team comprised 260 employees, which was 10.1 percent of its total employees.