From a catch-up perspective banks and NBFCs have very good upside left.
If Nifty50 has to go closer to 11,000 mark then it has to be the BFSI sector that needs to drive it. The uncertainties on loan growth and future NPAs will still remain a hangover for BFSI stocks. Hence, it is ideal to accumulate BFSI stocks in every decline so as to mitigate any near-term downside, Rusmik Oza, Executive Vice President, Head of fundamental Research at Kotak Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
edited excerpt:
Q: Midcap and Smallcaps have traded in line with benchmarks for last three weeks. Does it mean that the worst is over now and the growth will reflect in numbers soon or is it just a hope rally?
Off late the breadth of the market has improved a lot. The BSE Smallcap index rose by 3.6 percent last week with more than 190 stocks rising between 10-60 percent. This month-to-date (MTD) the BSE Smallcap index is up 14 percent as compared to around 7 percent gain seen in the Nifty50. Most mid and smallcaps are doing catch-up because of their beaten down nature.
Right now, broader rally seems to be on hope that things will go back to normalcy in the next few months but there are headwinds in the form of possible increase in COVID-19 cases and a reality check coming in July to August from Q1 earnings. Market needs to decisively cross the 200 WMA placed at 10,375 on a weekly closing basis for it to continue the upward momentum.
If Nifty50 breaks past the 200-WMA then mid and smallcaps could see more action than the largecaps. Within the smallcaps it will be the beaten downs names that could outperform meaningfully.
Q: Do you think India-China border situation is really a big concern? Which sectors will get affected and benefitted the most by this factor?
The markets would take the India-China standoff negatively only when there is a war like situation. Although forces are almost on war-like alert market is still not building in the scenario of a full-fledged war as of now.
The border issue may not impact earnings and economic growth but the increase in COVID-19 cases could. The standoff with China could lead to slight increase in defence budget and expedition of pending projects in this space.
Hence, companies associated with defence manufacturing and supply could benefit. Don't see any particular sector getting impacted negatively unless there is a full-fledged war in future.
Q: Market after consolidation again gained strength to march upwards, though there is still a risk of rising coronavirus infections. Do you think the market is waiting for vaccine to rally above 11,000 or the global liquidity (or any other strong reason) can take it above 11,000 mark easily in coming weeks?
The Nifty50 has already rallied 37 percent from the recent low. In the immediate future it first needs to break above the 200 WMA placed at 10,375 level decisively on a weekly basis for the rally to extend. The force of liquidity is very strong on a global scale and it is one factor that can drive Nifty50 closer to 11,000 in near future, provided global markets lead the rally. The Nifty50 is trading at peak valuations hence there is very less value left in the largecap space except for select BFSI stocks. Based on expert advice in the healthcare sector, commercial launch of an effective vaccine seems far away. As and when we have an effective vaccine markets will respond positively at that time. As of now 11,000 seems to be the best case scenario for Nifty-50 based on earnings and valuations.
Q: Reliance Industries completed its net debt free plan well ahead of its own target of March 31, 2021, and as a result it touched a fresh record high last week. Do you think the stock will cross Rs 2,000 mark soon given the expected growth in coming quarters, and what are key triggers to watch out for?
The Bloomberg consensus estimate of Reliance post June 15 works to Rs 1,700. We have a one year price target of Rs 1,750. Hence, the one year upside as of now comes in the Rs 1,700-1,800 price range. These estimates factor in the reduction in interest cost, future cash flows and SOTP valuation of various businesses. If liquidity force takes the Nifty50 above the 200 WMA then Reliance can go to Rs 2,000.
There are many triggers to watch for in Reliance in future. The company is working on two large transactions: 1] sale of 20 percent stake in oil-to-chemicals (O2C) business to Saudi Aramco and 2] monetization of fibre InvIT. With such huge cash inflow the company also has the option of exploring inorganic opportunities in future.
Q: Banking and financials has been the key factor for directional move on either side in the last one month or so. What does it indicate, as it is the backbone of the economy?
BFSI stocks have grossly underperformed the market in the recent rally due to uncertainties associated with the sector. However, BFSI stocks have made a smart come back in the last few trading sessions. Few banks have highlighted that number of customers under moratorium have gone down sharply in June. HDFC Bank said on last Wednesday that its consumer loans have gone back to pre-COVID levels. The Supreme court hearing was also not too negative for banks. If Nifty50 has to go closer to 11,000 mark then it has to be the BFSI sector that needs to drive it. The uncertainties on loan growth and future NPAs will still remain a hangover for BFSI stocks. Hence, it is ideal to accumulate BFSI stocks in every decline so as to mitigate any near term downside.
Q: What are your thoughts on the Supreme Court's comments on the AGR issue? And also what is your take on entire telecom space and do you expect more tariff hikes in coming months as there are only three players?
The matter is still sub judice as the next hearing is in the third week of July. Based on the last hearing it seems that the Supreme Court is not averse to staggered payments but needs a reasonable amount to be paid upfront. The telecom sector looks very attractive and we have a buy rating on Bharti Airtel with a target price of Rs 690. Bharti reported ARPU of Rs 154 per subscriber per month in Q4FY20. In the post results concall of Q4FY20 the management of Bharti said that current tariffs are still at low levels. They have guided for ARPUs to move to Rs 200 in the short term and Rs 300 in the medium term. Besides tariff hikes, ARPU will also be driven by increase in share of 4G subscribers (i.e. better mix).
Q: What are those sectors one should stick to and avoid now, why?
From a catch-up perspective banks and NBFCs have very good upside left. On Price/Book Value basis most banks and NBFCs are trading at lower end of their historic range. Other beaten down sectors related to economy which we like are: capital goods, construction, utilities, metals and oil & gas. Most of these economy related sectors will report very poor numbers in FY21 due to COVID-19 and lockdown. However, the low base and recovery in the economy will lead to very high growth in FY22 earnings.
Hence from a FY22 perspective most of these economy related sectors look attractive. Sectors we would stay away are: consumer durables (due to rich valuations), Agro Chemicals (due to steep run up and rich valuations), IT (due to subdued earnings growth and higher valuations) and pharma (due to sharp run up and rich valuations in the context of poor RoEs).
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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