Volatile movements based on current political scenario involving elections, along with any downside on GDP growth are big headwinds for the market, Naveen Kulkarni, Head of Research at Reliance Securities said.
Volatile movements based on current political scenario involving elections, along with any downside on GDP growth are big headwinds for the market, Naveen Kulkarni, Head of Research at Reliance Securities told Moneycontrol’s Uttaresh Venkateshwaran. But that could be seen as an opportunity.
“Investors should be buying on dips stocks, which are backed by quality and earnings growth. This is a good time to build portfolio as higher volatility will mean lots of opportunities to accumulate quality stocks at discounted prices,” he told the portal. Edited excerpts:
What has your assessment of the current earnings season been? What are the big hits and misses?
The earnings season was by-and-large in line with the consensus expectation. Outlook on margins ahead is a little bleak. While there have been some cuts to the earnings estimates, it isn’t very significant. Nifty companies’ earnings for FY19 have been cut by 5% and for FY20 by 2% which isn’t very significant.
Some of the big hits in terms of outlook and quality of earnings have been for ICICI Bank and Axis Bank. Misses have been for Bharti Airtel, Asian Paints and Ultratech.
How should an investor approach the market from a one-year view?
One-year view of an investor should be to focus on value, backed by quality and earnings growth companies. The next six months will be volatile because the political temperature will climb.
State elections followed by general elections will keep the markets guessing. Thus, earnings visibility and valuations become very critical factors.
Investors should be buying on dips stocks which are backed by quality and earnings growth. This is a good time to build portfolio as higher volatility will mean lots of opportunities to accumulate quality stocks at discounted prices.
What are the key headwinds and tailwinds to watch out for?
Political scenario continues to evolve and next one month will set the tone for the general elections. So, market volatility is a key headwind and if GDP growth rate were to slow down then that will present as key challenge for growth.
However, the current macro situation is improving. The banking system has also passed the peak of challenges of stressed asset cycle. Overall the macro situation seems more encouraging and constructive now.
Given the backdrop of NBFC situation, how should one look at such stocks? Any bets in the financials space?
The near-term challenges of liquidity in NBFC sector are slowly receding but there are structural challenges of the cost of funds having risen for NBFC sector.
However, the companies with niche positioning and solid track record are likely to gain market share over the medium term.
We like Shriram Transport, Bajaj Finance and Mahindra and Mahindra Financial services in the space. We also like the gold financiers Muthoot and Manappuram as they have lesser challenges of asset liability mismatches and can deliver credible RoEs.
What is your outlook on some of the infrastructure or capital goods segment, given how Larsen & Toubro’s performance during Q2 has been?
Larsen & Toubro (L&T) reported strong numbers. Overall the capex cycle seems to be picking up albeit slower and later than expected. There could be some short-term challenges as government capex closer to elections is likely to dwindle, but from a medium-term perspective the sector is likely to do well as valuations are reasonable and order books are pretty strong.
What are your top 5 stock picks? Could you share the price targets and a rationale as well?
Infosys | Target: Rs 795
It is gaining ground and inching closer to the market leader in terms of deal wins but has a significant valuation gap. Offers decent upside from current levels and it is unaffected by the domestic challenges. Hence, a solid portfolio stock.
ICICI Bank | Target: Rs 390
It is a fast-improving lending book with a major cleanup. It has a solid retail franchise and well-placed to gain market share.
Sonata Software | Target: Rs 420
This high quality mid-cap IT company is available at discounted valuations of 12x FY20E earnings.
Engineers India | Target: Rs 169
All time high order book provides revenue visibility. The valuations are cheap at 13x FY20E earnings.
DCB Bank | Target: Rs 207
It is a fast-growing bank in the midcap space with solid exposure to MSME space. It is likely to gain market share from NBFCs.
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