HDFC Sec sees rural facing cos, infra plays emerging as a dark horse in 2018

Every $10 per barrel rise in the price of crude oil could worsen India's fiscal balance by 0.1 percent and current account balance by 0.4 percent of GDP, Deepak Jasani, Head – Retail Research at HDFC Securities, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

He sees rural facing and infrastructure plays emerging as a dark horse ahead of the elections in 2018. "Housing and gold finance are spaces where one may be able to shortlist a few stocks where the recent sell-off may have resulted in attractive valuations," he added.

Edited excerpts:

Q) The crude price shock has taken equity markets by surprise. Do you think that if crude stays around $73 per barrel it would spell trouble for the economy as well as OMCs?

A) Every $10/bbl rise in the price could worsen India's fiscal balance by 0.1 percent and current account balance by 0.4 percent of GDP. However, our economy can possibly adjust better with a gradual rather than a sudden rise in crude prices.

Oil marketing companies (OMCs) may come under pressure if they are not allowed to revise prices of fuels regularly ahead of state elections which are due at regular intervals. This may temporarily impact sentiment towards these stocks, although the medium-term outlook remains positive.

Q) Mutual fund flows have slowed down considerably in March thanks to global volatility. Do you think the reduction in DII flows would play a role in charting direction for our markets?

A) Domestic institutional investor (DII) have become a dominant force lately in determining flows into the market. In case, flows into DIIs continue to fall, then we would require foreign institutional investor (FII) flows to accelerate which seems a bit difficult at these levels and point in time.

Q) Any stock/sector which could emerge as a dark horse in 2018 or FY19?

A) Rural facing and infrastructure sectors could do well in a year when we have so many elections lined up.

Q) There were many quality stocks which have corrected in the last 2-3 months thanks to global volatility. Any top five contrarian stocks which investors can buy at current levels and why?

A) Housing and gold finance are spaces where one may be able to shortlist a few stocks where the recent sell-off may have resulted in attractive valuations.

Q) Midcaps are trading at over 70% premium (in terms of P/E) to Nifty. Do you think this premium could actually narrow down in 2018 and possibly in 2019?

A) The calculation of midcap P/E gets skewed by some large sized loss-making companies. Hence, it may not be right to say that they quote at such a large premium. Even otherwise, with a low base, and agility to respond to changing circumstances, midcaps deserve to trade at some premium.

Q) Any secular story which you are tracking? Are there any businesses which are trading at a fair price? Great business at a good price are seldom seen?

A) There are very few undiscovered stories in the current market where largecaps are fairly researched and midcaps have seen adequate discovery in valuations. However, the forthcoming earning season may throw up some fresh stocks to be tracked in terms of their long-term growth potential.

Q) Do you think March quarter earnings could be as strong as consensus estimates? What are your estimates for FY19?

A) Q4 earnings are likely to be quite robust due to a lower base and effects of GST introduction withering out.

Q) What is your assessment of the banking situation? It looks like new skeletons are coming out of the closet every day. Do you see PSU banks a potential long-term buy at current levels or investors should stick to private sector banks and NBFCs?A) PSU banks will keep throwing up trading opportunities whenever their problems are tackled seriously with new measures. For long-term investment, we need consolidation, changes in governance, stricter employee accountability at all levels, robust risk management practices and better compensation structure which may happen only after the next general elections.