We expect the Nifty earnings to grow at a CAGR of ~20 percent between FY19-21 and the economic fundamental is likely to improve further, says Sundar Muthukrishnan of Elara Capital
We expect the Nifty earnings to grow at a CAGR of 20 percent between FY19-21 and the economic fundamental is likely to improve further. Given this backdrop, the long-term prospects look very attractive and hence investors should buy into dips, Professor Ravi Sundar Muthukrishnan, Head-Institutional Equity Research, Elara Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q. The New Year started off on a muted note with key benchmark indices slipping below crucial support levels and moving averages. Do you think this is the dip which investors can buy into?
A. Our analysis suggests that months preceding general elections, market volatility increases. Heightened concerns around global slowdown, trade wars, Brexit, monetary tightening in some developed markets will add to the market volatility in the short term.
However, we expect the Nifty earnings to grow at a CAGR of ~20 percent between FY19-21 and the economic fundamental is likely to improve further. Given this backdrop, the long-term prospects look very attractive and hence investors should buy into dips.
Q. Are we heading for growth slowdown in the US in 2019 or a possible recession?
A. Incremental data points for key developed and emerging markets—Japan, Germany, Brazil, and South Africa apart from the US and China—point towards a challenging environment for global growth over the next 12 months.
The ongoing US-China trade war, Brexit and the tussle between the US Fed and US administration are additional concerns. In light of all this, it is not incorrect to say that most of the worries are global in nature and the global slowdown signs are ominous.
Q. Any top five stocks or sectors that you are recommending to clients for a period of more than 1 year?
A. Some investment themes for CY19 are:
1. We expect banks to do well with the continuation of robust growth in retail and services credit. In H2CY19, we can expect a recovery in corporate credit (ICICI Bank and HDFC Bank).
2. Infrastructure is likely to see the improved pace of execution and will be a key positive for players who have tied their financials and those with strong execution capabilities (PNC Infra).
3. Capital goods companies, particularly in Transmission, Distribution and Transportation, are witnessing strong order inflows and are favourably placed (KEC International).
4. Consumer durables companies will benefit from (a) low penetration levels, (b) shortening replacement cycles, and (c) cost reductions driven by import substitution and supply chain efficiencies due to GST (Crompton Consumer).
5. Auto companies are expected to register stronger revenue growth on the back of declining fuel prices, new product launches and benign or reducing interest rate environment (Maruti, Hero MotoCorp).
Q. Amid the global slowdown, do you think India will be able to sail through the political drama unfolding in the first half of 2019?
A. While we do expect India to feel the impact of slowing global economy, but we are far more insulated compared to other export-oriented EMs.
Benign inflation, falling commodity prices, pause or fall in interest rates, increase in rural consumption due to loan waivers, elections spending, rural welfare schemes, investment, and public capex as well as earnings recovery will bode well for Indian equities.
The political drama will keep the market circumspect till May but in H2CY19, we expect the market to do well on the back of strong economy and company fundamentals.
Q. A report suggests equity funds have mopped up investments worth over $17 billion that makes the FII selling figure of $4.5 billion pale in comparison. Do you think the number could fall if the volatility increase?
A. Usually, we find retail investors pulling out money in times of market correction, therefore strong SIP flows is a positive signal - despite ~13 percent correction after August 2018 peak, retail investors have stuck to SIPs.
Taking a cue from this, we expect financialisation trend to continue despite the market volatility. Moreover, lack of investment opportunities in other asset classes, especially in Mumbai and NCR which account for ~50 percent of the SIPs, we expect strong SIP flows to continue.
Q. The Sensex has grown like 100x in 32 years, at 15 percent CAGR. Do you think, 2019 will also give us a similar opportunity to enter and remain invested for a long time to create wealth?
A. Equity as an asset class is well placed to provide superior returns over the long term. India is and will likely remain the fastest growing major economy over the next few years at least.
Also, we believe we are leaving behind the low corporate earnings growth environment and are at the cusp of a strong earnings recovery cycle. If you put all these together, I believe that there will be opportunities to generate superior returns over the long term.
Q. What are your views on public sector banks after the recent RBI report suggested that the headwinds in terms of NPA mess could be abating?
A. We expect a revival in corporate credit growth in FY20 (albeit in the second half due to election-related uncertainties).
Infrastructure sector (35 percent of industrial credit), is showing initial signs of recovery after a prolonged contraction and we expect it to lead the industrial credit growth over FY20-21.
After the NCLT resolutions, we also expect the credit cost to decline on an average by 70-80 bps for the banking sector. Though the environment is improving for the sector, we continue to like private sector banks and only a select public sector banks.
Q. What is your call on small anf midcaps for 2019? How should one choose the right kind of stock for investment?
A. We expect midcaps to outperform in 2019 on the back of (a) valuation comfort as midcaps are trading at 8 percent discount to largecaps and (b) softer crude and commodity prices that can provide support to costs/margins (Nifty midcap 100 currently has a low net profit margin of 3.9 percent) and also spur earnings growth due to low base.
Among midcaps, we prefer low leverage and reasonably valued stocks with (a) earning visibility for the next two years; (b) high quality/efficient management, top brands, an industry leader, first mover advantage, and capital allocation discipline; and (c) location advantages (e.g cement).
Q. Given that Brent is trading around $55 to a barrel, what is your call on OMCs and aviation stocks?
A. We estimate global refining capacity utilisation to be around 83.9 percent by CY19 and 84.2 percent by CY20 (up from 83.5 percent in CY17 and 83.9 percent in CY18), nearing the historical level of 85 percent during CY04-06, which is likely to strengthen refining margin.
We like OMCs that are more into refining and diesel constitutes a major chunk of their refining output. The double whammy of rising crude and INR faced by aviation is now behind us.
We expect the benefit of falling crude, which constitutes ~30 percent of input costs and INR strengthening to improve RASK-CASK margin and the whole of H2FY19 to benefit.
Q. TCS and Infosys will kick start earnings season this week – what are your expectations from these two big names of the IT sector?
A. We expect Infosys to maintain its margin guidance and continue to expect that the new band of 22-24 percent target to be maintained and also expect TCS to widen the EBIT margin gap with Infosys this quarter.
No doubt, IT had a strong price performance in 2018, but we think it is unsustainable in CY2019 due to headwinds in terms of receding rupee depreciation benefits and a slowdown in global growth outlook.
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