'Remain cautious on PSU banks, NBFCs; these 6 stocks can give decent returns in Modi 2.0'

Sensex is trading at around 17-18x its 1-year forward earnings levels and is near its long term average. The valuations indicate that the market takes a breather even as the expected earnings normalisation is in play, said Hemang Jani, Head – Advisory, Sharekhan by BNP Paribas in an interview to Moneycontrol's Sunil Shankar Matkar.

Q: What are your expectations from Union Budget FY20?

A: Expect the government to support  RBI's monetary efforts by providing a fiscal stimulus and other bold remedial measures.

Also, the budget may provide clarity of the next economic milestone, social development and infrastructure plans.

Hemang Jani

Head Equity Sales & Advisory|Sharekhan

• Easing oil price, inflation, bond yields to drive market rally in 2019: Sharekhan

• Can't rule out 12-15% equity return over long term; 5 largecaps that can give double-digit returns: Sharekhan

• Maintain positive view on RBL bank with 25-27% return potential: Sharekhan

Plans relating to labour laws, judicial reforms among others shall also be unveiled in the budget.

Q: Do you recommend auto stocks given the recent slowdown in sales?

A: Subdued volume outlook coupled with elevated cost pressure would overweigh on the margins; auto industry's earnings are likely to remain under pressure over the near to medium term.

We prefer M&M due to expectations of a double-digit growth which augurs well for the company in a challenging environment.

In the tyres segment, we prefer Apollo Tyres as it has a healthy outlook in both Indian and European operations along with strong pricing power and market share in the PV and CV segments.

In the ancillary space, we like Exide Industries given robust traction in the replacement and industrial segments.

Q: After a 1,000 point correction from record highs, is the market fairly valued?

A: Sensex is trading at around 17-18x its 1-year forward earnings levels and is near its long term average. The valuations indicate that the market takes a breather even as the expected earnings normalisation is in play.

Also, consensus estimates for FY20 remain healthy, with expectations of 18-20 percent growth in earnings of BSE companies, which is achievable.

Q: How should one approach financials, NBFCs given the recent promoter pledges and debt defaults? Will there be a rise in NPAs in the near term?

A: Investors should be very selective while trading in the financial space due to the ongoing NBFC crisis.

We are positive on retail-focused private banks (HDFC Bank, Kotak Mahindra Bank, RBL Bank) and select corporate-lending banks such as ICICI Bank, Axis Bank and SBI.

We advise caution on PSU banks at large and NFBCs barring few names like Bajaj Finance.

Q: Should one increase exposure to quality private banks or PSU banks stocks?

A: We would adopt a balanced approach and would suggest having moderate exposure to HDFC Bank, Kotak Mahindra Bank and RBL Bank.

In PSU banks some allocation could be done towards SBI.

Q: Do you think a further rate cute is the only way to facilitate slowdown in consumption and economy?

A: There are multiple ways to boost growth. The quickest would perhaps be to somehow increase public spending and the upcoming Union Budget will hopefully do that.

Also, an increase in farmer incomes could boost consumption as rural distress is one of the key factors for the slowdown.

More job opportunities can be created if the government and the private sector work together. Reduction of tax or tax exemptions to certain industries can also boost growth and consumption in specific segments.

Q: Do you expect Sensex to hit 50,000 during Modi 2.0? Which stocks can turn multibaggers in the next 5 years?

A: We don't have a specific target for Sensex but we believe the earning cycle will pick up in the second half of FY20, where we could see a good upside in the market.

Correction in the market should be used by investors to buy quality stocks. Some of the stocks we like are HDFC Bank, Kotak Mahindra Bank, Gujarat Gas, L&T Technology services, Tech Mahindra and RBL Bank.