Hemang Jain expects earnings recovery to be broad based in Q4 compared to 12 percent growth seen in Q3, fading impact of GST to aid earnings.
With many states assemblies going into elections this year and the Centre elections in 2019, political developments will have an impact on market movements. Hemang Jani, Head - Advisory, Sharekhan feels that political risks should not be taken lightly and dealt with proper hedges. We do not feel that some market participants are overemphasizing on political uncertainties, he told Moneycontrol's Sunil Shankar Matkar.
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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?
In all, Sensex and Nifty have slumped nearly 10-12 percent, after having scaled peaks of 36,000 and 11,000, respectively. Interestingly, the extent of the correction is in line with recent previous dips seen in the Indian markets lately. We may continue to see volatility in days to come on account of possible trade war, elections lined up during the year.
In terms of valuation, Sensex is trading close to 18x on 1 year forward basis, indicating we are not cheap on PE Basis. However, on market cap to GDP and Price to Book ratio, we are not that expensive & are trading at 0.9x and less than 3 times Price to Book (compared to euphoria level of 4 times P/B Seen in 2007).
What is your March 2019 target for the Nifty and how much return do you expect in the next 12 months? Do the earnings and economic growth expectations justify current market valuations?
The Sensex is trading close to 18x its one year forward earnings and is clearly not cheap anymore. The consensus earnings estimates are factoring a 20 percent plus annual growth rate in Sensex earnings over FY18 to FY20. Though the revision in earnings of some banks and other adjustment could lead to some downward revision in estimates going forward, the healthy growth in earnings would definitely support equity markets.
Historically we have seen equities have delivered 12-15 percent returns, so if earnings growth improves we are likely to see similar kind of returns. Assuming earning growth of 22 percent and 17 percent respectively for FY19 and FY20, if we assign multiple of 18x then we may see Nifty to reach 11,700. If we assign 17x then we may see Nifty at 11,400.
Earnings for Q4FY18 will kick off in second week of April. What are your earnings expectation for Q4 and FY19?
We expect earnings recovery to be broad based in Q4 compared to 12 percent growth seen in Q3, fading impact of GST to aid earnings. Street is currently factoring around 14 percent growth in revenues & 15 percent growth in earning for Nifty companies in Q4FY18, while for next 2 years street is factoring a 20 percent plus annual growth rate in Sensex earnings over FY18 to FY20.
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 overemphasizing on political uncertainties to create buying opportunities?
Political risks are not fully priced in, can arise at any point in time & affect sentiment and create new bouts of volatility. This year is election heavy, given the schedule of elections both across states and centre in 2019. We do not feel that some market participants are overemphasizing on political uncertainties. Political risk should not be taken lightly and dealt with proper hedges.
What are the five important things to look at in FY19 for an investor?
Stock picking will play important role as 2018, Select companies with clear revenue visibility and backed by good management, avoid bottom fishing in stocks just because stock have corrected sharply and not backed by Fundamentals.
Optimal diversifiaction is advisable across various sectors to control and mitigate excess risk, regular review and rebalancing is required to ensure asset allocation is adhered with.
What are the 5 stocks for FY19 that you think could turn multibaggers?
Some of the stock which could provide decent return are Arvind, Indraprastha Gas, V-Guard , Ratnamani Metal and Tubes and RBL Bank.
Arvind posted decent performance during Q3FY2018, driven by pickup in consumer demand and settling of GST transition in major trade channels. The company expects most of its emerging brands to turn profitable in FY19, with unlimited growing at mid to high single-digit same-store-sales-growth.
The 15 percent year-to-date correction in stock price of IGL given concern of increase in gas cost are overblown in our view given significant pricing power of IGL.
Moreover, favourable regulatory/judiciary/policy regime [ban on new diesel vehicles above 2000cc, ban on use of polluting fuels in NCR region and Petroleum and Natural Gas Regulatory Board to start bidding for 86 GAs comprising 156 districts for city gas distribution (CGD) development] are likely to provide sustainable double-digit volume growth and thus, justifies the stock’s premium valuation (27.3x FY2019E EPS and 21.8x FY2020E EPS).
Led by robust volume growth and likely expansion in EBITDA margin, we expect IGL to report strong earnings CAGR of 26 percent over FY2017-FY2020E along with healthy return on equity (RoE) of 20-22 percent. We are positive on growth outlook for IGL and expect 15-18 percent return from current levels.
Number of initiatives are underway to accelerate revenue growth from non-south markets. Higher focus on above the line spending will consolidate its position as a pan-India player. Cash rich balance sheet and robust return ratios justify premium valuation of V-Guard.
Order book continues to remain strong and management anticipates strong order book going forward with expectation of revenue exceeding Rs 2,000 crore in FY19. Given healthy earnings growth of 30 percent CAGR over FY18-20E, we believe that the stock remains a good choice for investment in the long term.
The stock has corrected over 30 percent from its 56-week high. We recommend investors to use the market volatility to accumulate the stock for an investment horizon of 12-15 months.
During Q3FY18, RBL reported healthy performance on account of strong growth in loan book and expansion in NIM.
RBL has posted good business momentum and is expected to carry on this traction for the next few years. RBL is trading at reasonable valuations of 3.1x its FY2019E book value. We maintain our Positive view with a 25-27 percent upside potential.
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?
An important milestone for the banking sector is resolution and quantum of haircuts of most NCLT-1 cases over next few months. Resolution developments in four major accounts (Essar Steel, Bhushan Steel, Bhushan Power and Binani Cement) seem to be in positive direction, smaller cases may see relatively higher haircuts.
Corporate private banks (like ICICI Bank and Axis Bank) can see higher haircuts but are better placed than PSUs given their additional capital buffers to absorb stress/provisioning.
Timely resolution will be key for FY19 and would abate asset-quality concerns.
The RBI exemption to spread out MTM losses has come as a relief. The dovish stance of the central bank on inflation bodes well for bond yields. Hence, there is a possibility for banks to reverse their MTM provisions made in Q3 and spread them over four quarters. Loan growth at the system level has picked up to 10 percent+ after several quarters of mid-single-digit growth. Credit growth is gaining momentum as retail growth continued its pace, driven by unsecured products. However, corporate credit growth may not happen immediately.
We expect Private Banks and NBFCs to benefit and take further market share from Public Sector Banks (especially in corporate, wholesale and infrastructure segment), which will help them outperform industry growth. We still remain negative on the PSUs banking sector given the structural headwinds. We only prefer SBI among state owned banks.
Sharekhan Preferred Picks: HDFC Bank, Bajaj Finserv, IndusInd Bank.