'12K is possible but don't see Nifty at a new high by December'

The recent pullback has been led by only a few stocks, which makes it very shallow. Looking at peak valuations and limited upside in individual stocks, it should be a sell-on-rise market going forward, Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:

Q: What are your thoughts on RBI’s monetary policy decision and commentary? What more can RBI do to revive growth?

The RBI policy has been very dovish without any rate cut. It strengthens focus on the yield curve and provides a helping hand to increase credit offtake. The policy stance is very accommodative and would remain as long as necessary, even going into FY22. The decision to keep rates unchanged was expected but the bigger unconventional announcement was the introduction of the open market operations (OMOs) in state development loans (SDLs), as state governments would have to borrow more given large revenue slippages and uncertainty on the GST compensation front. In this situation, OMOs for SDLs should help in controlling the cost of state borrowings by reducing the spread over G-Sec.

In anticipation of an increase in bond supply, the RBI has increased the size of OMOs for G-Sec from Rs 10,000 crore to Rs 20,000 crore. The increase in OMOs and conducting special OMOs for SDLs should be supportive of liquidity conditions and at the same time, aid in the borrowing programmes of the central and state governments. There are other measures that will help banks and NBFCs to accelerate lending, especially in the housing finance segment and priority sector lending. MPC's decision to look through the current inflation as transient and address the more urgent need to revive growth and mitigate the impact of COVID should also aid market sentiment. Overall, the RBI policy has been very granular and supportive at a time when the revival of the economy is of prime importance.

Q: What are your expectations from the September quarter earnings? Which are the sectors that will perform well?

For Q2FY21, we expect the net profit of Nifty50 Index to increase by 0.6 percent YoY basis and our universe of stocks to decrease by 16 percent on YoY basis. Banks, IT services, metals & mining, cement and pharma sector will drive Q2 earnings. Sectors where many companies are likely to report earnings growth of more than 20 percent in Q2 are tyres, cement, FMCG, agro-chemicals, diagnostics, metals & mining and pharmaceuticals. Expect YoY decline in several sectors due to low demand, weak execution and high base effect due to lower tax rate reduction in Q2FY20. Few sectors that may report poor numbers are capital goods, gas utilities, consumer durables, retailing, NBFCs and automobiles.

Q: What are the sectors that one should add, hold or remove from the equity portfolio and why?

Based on the earnings outlook, improvement in return ratios and valuations, we recommend investors to add stocks in sectors like banks (private sector), larger NBFCs, gas utilities, power utilities, FMCG, metals & mining, oil & gas (ie oil marketing companies) and telecom. Certain sectors like IT services, diagnostics, agro0chemicals and pharmaceuticals have seen stock prices run up too fast too soon. Hence one needs to be slightly cautious in adding stocks in these sectors. Certain sectors will see a higher impact on earnings. However, since stock prices in these sectors have recovered sharply their valuations have become rich. Investors can avoid such sectors and only look at one or two outliers and select stocks in these sectors. Sectors to avoid in general are: automobiles, paints and consumer durables.

Q: Given the gradual rise in the equity market, do you feel the benchmark indices can hit earlier record highs by December-end? Is it a buy-on-dips or a sell-on-rally market?

Markets are still in a bullish phase as seen from the recent pullback of the Nifty50 from the support levels of around 10,800. The Nifty50 could trade in a wider range of 1,000-1,200 points in the near future because of higher VIX levels. The recovery and resumption of the rally in US markets is helping other markets, including Indian markets, to surge. Since the Nifty50 has broken the recent high it could test the 12,000-mark. If 12,000 gets broken on both daily and weekly basis, then it may attempt to test its previous peak of around 12,400 levels. Don't expect Nfity50 to go into a new high so easily by December-end as there are multiple headwinds in the form of US elections and the potential of a second wave of COVID-19 during winter. The recent pullback has been led by only a few select stocks which makes it very shallow. Looking at peak valuations and limited upside in individual stocks it should be a sell-on-rise market going forward.

Q: Given the consistent outperformance by midcap and smallcap indices, do you expect them to end the year with more than 20 percent gains?

Interestingly, there is some divergence in the performance of midcaps and smallcaps this calendar year. For example, the Nifty midcap index 100 is flat in this calendar year-to-date whereas the BSE smallcap index is up 9.25 percent in this calendar year to date. The Nifty midcap 100 index is trading at 17,093 at present and is still far away from its peak of 18,367 seen in February 2020, whereas the current level of 14,966 of the BSE smallcap index is very close to its peak of 15,430 seen in September 2019. Don't see either of the indices gaining more than 20 percent in this calendar year. The midcap valuations on forward PE basis are higher than that of Nifty50, indicating some kind of overvaluation in this space as compared to largecaps. Smallcaps, on the other hand, offer enough bottoms-up opportunity as the universe of the stock is vast.

Q: Do you expect another fiscal stimulus from the government?

The market has been anticipating and expecting some kind of fiscal stimulus package from the government but nothing has materialised as of now. The stimulus, if any, could be more focussed on troubled sectors rather than across the board. The government's financial position (central and states) is weak with a sharp increase in the fiscal deficit, which has stayed persistently high and also the sharp jump in public debt-to-GDP. Recently, the government announced its borrowing programme for FY21, wherein it has retained its borrowing plan for dated securities. This can provide some indirect hint that the government is not looking to increase its fiscal deficit target for this year.

Q: Do you think the government should reconsider GST rates and ease more regulations to shore up the economy?

Although economic activity and tax revenues will improve over the next few months, we expect a shortfall of Rs 1.5-2 lakh crore in FY21 CGST collections. The outcome may be particularly grim for states (likely shortfall of around Rs 2.5-3 lakh crore in SGST), with a very small portion covered through cess transfers. While there has been an improvement in tax collections, they remain well short of budgeted targets. Gross tax revenue for 5MFY21 has fallen 24 percent, with 33 percent contraction in direct taxes and a contraction of 17 percent in indirect taxes. In the recent past, there were rumours of GST rates likely to go down for two-wheelers but nothing materialised in the GST council meeting. In this year's budget, the government has already increased cess on cigarettes. Taking a holistic view, it is very difficult to anticipate any changes in GST rates in this fiscal year. Maybe we can expect some changes in the forthcoming Union Budget for FY22.