Nifty near record high: Motilal Oswal is betting on these sectors, should you?

At current valuations, Siddharth Khemka, Head- Retail Research, Motilal Oswal Securities, we see limited triggers for a further re-rating, unless accompanied by a material surprise in earnings. "Elevated valuations, coupled with challenging macros and a busy political calendar, will keep the index rangebound in CY18."

Khemka suggest investors remain underweight on metals and cement. "One sector to completely avoid would be telecom given the lack of earnings visibility and persistent competitive headwinds."

He likes private financials, consumer discretionary, FMCG, IT and select quality midcaps. "We are incrementally more positive on pharma, given the improvement in newsflow and bottoming out of pricing pressure in the US."

Edited excerpts

A: The Sensex and Nifty have seen good support in recent months helped by just a handful of stocks, while the broader market continues to see downward pressure. The Sensex currently trades at a 12-month forward price-to-earnings (P/E) of around 19-20 times, which is at a premium of around 10-15 percent to its long-period average of 17.5 times.

At current valuations, we see limited triggers for a further re-rating unless accompanied by a material surprise in earnings. Elevated valuations, coupled with challenging macros and a busy political calendar, will keep the index rangebound in CY18.

Nonetheless, with the arrival of monsoon (predicted to be the third consecutive year of normal monsoon) and the improvement in underlying demand in the economy (automobile numbers, Purchasing Managers' Index, cement volumes), the micro picture is looking brighter.

A: Some of the other major factors that are affecting investor sentiment are rise in crude oil prices, interest rates, monsoon, etc. As we move closer to the election cycle, we expect volatility to remain elevated.

Reversal of the benign monetary policy stance and higher crude oil prices have kept the pressure on macros amid continued selling by foreign institutional investors. Progress of monsoon, political developments (potential opposition unity for the CY19 general elections) and trade war concerns are likely to keep the markets on the edge.

A: Midcaps have struggled over the past few months, resulting in their underperformance versus largecaps. Over the last 12 months, midcaps have delivered 3 percent returns as against 13 percent for the Nifty.

In June , Nifty Midcap100 was down 3.8 percent as against Nifty’s fall of 0.2 percent. Despite the sharp correction in midcaps, their valuations still remains stretched. In terms of P/E, midcaps still trade at a 20-25 percent premium to the Nifty and thus could be vulnerable in a volatile market.

A: As we commence the FY19 earnings season, the overall picture is looking brighter, even as macros have deteriorated. We expect FY19 to herald the earnings recovery for India, although the market will remain distracted by several global and local macro factors.

As far as the Q1 FY19 earnings season is concerned, we estimate Nifty PAT to grow 26 percent YoY, which if delivered, will be the highest in 16 quarters. We believe Q1 FY19 will benefit from a favourable base last year when pre-GST (Goods & Services Tax) destocking by trade had impacted the performance of several sectors like automobile, FMCG, retail, healthcare and cement.

Global cyclicals like metals and oil & gas are likely to continue leading from the front and contribute significantly to incremental profits. The consumption recovery story continues gaining ground, with discretionary sectors like autos, retail and FMCG expected to post a solid performance, aided by a low base and a healthy underlying demand scenario.

State run and corporate private lenders will continue to be a drag on performance, even as retail-oriented private banks posted another quarter of solid growth.

The reported numbers of non-banking financial companies (NBFCs) could be impacted by Ind-AS-related accounting changes. IT and pharmaceuticals are expected to declare strong double-digit earnings growth after many quarters.

Metals would announce another quarter of strong performance, while telecom is expected to yet again report a loss.

A: In the current environment, we prefer quality and earnings visibility plays, despite the not-so-attractive near term valuations. We have a long-standing positive view on the consumption recovery theme for CY18, with preference for rural consumption in particular (autos, retail and FMCG).

Auto sector continues to report strong numbers, indicating a consumption revival. Private financials remain the best secular India story, given the underlying solid tailwind of value migration from state-run banks.

The recent currency depreciation, coupled with improved management commentaries and improving demand outlook, makes IT a good hedge for the portfolio, despite the recent run-up.

Overall, we like private financials, consumer discretionary (auto and speciality retail), FMCG, IT and select quality midcaps. We are incrementally more positive on pharma, given the improvement in newsflow and bottoming out of pricing pressure in the US.