We maintain a target of 36000 on the Sensex subject to the full development of ongoing Q3 and changes in valuation given the global clampdown, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q) D-Street bounced back sharply after February month expiry last week. Do you see the pain could return to market or the relief rally is likely to continue?
A) To get stability in the domestic market, the global market has to come out of the phase of volatility. The main factors for the recent and sharp collapse in the global equity market was; premium valuation, rise in global bond yield prevailing to inflationary pressure and worries to US fiscal deficit.
Recently, a relief rally has initiated in the global market led by no hike in US Fed in the February meeting, good earnings results, and stability in bond yield.
Head of Research|Geojit Financial Services
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Global investors were looking for a bargain gain after the last week’s collapse which was a weakest weekly loss in the last 18 months.
Dow fell by 12 percent on an intraday basis from 26th Jan to 9th Feb. From this low, Dow has recovered by 5-6 percent during which US 10-years bond yield is holding at 2.9 percent, near the 5-years high. This relief rally will be spread to emerging market like India if this trend is maintained in the near-term.
Q) We witnessed a relief rally last week but the way equity markets rallied in the year 2017 a case of valuations does come across after such a move on D-Street. Do you see the correction to continue?
A) We have to understand that the valuation was increasing in the last 2-years without any earnings growth. So similarly, it is also possible that valuation may not increase or reduce even when the earnings growth has started.
Hence it is possible for a further correction in valuation if liquidity reduces from the global or domestic side.
Q) Plenty of mid & smallcap stocks witnessed double-digit cuts. What should investors do who have seen such erosion in their portfolio? Sit tight or book profit on rallies?
A) If the correction is so high and it is in high-quality stocks, it is advisable to maintain or average the respective stocks.
It is also a good time to measure your portfolio risk and accordingly add high-quality blue-chips and reduce high beta stocks. Higher exposure to defensive stocks which are available at fair valuation will work in the long-term.
Q) There are many investors who have suffered a big cut in their portfolio not just in direct equities but mutual funds thanks to global rout. What is your advice to them?
A) Well, we had a one year target of 36,000 for Sensex which was reached in the month of January itself. This target has been maintained subject to the full development of ongoing Q3 and changes in valuation given the global clampdown.
We continue to have a moderate outlook for equity during the year given premium valuation, increase in interest cost and reduction in liquidity.
Till date, if you have lost the chance to reduce your exposure in high beta stocks then an uptick is likely in the near-term which can provide an opportunity to play in this volatility and restructure your portfolio accordingly.
Q) Top five sectors which you think are a good buy even at current levels and why?
MNCs are diversifying their raw material or RM sourcing arrangement from China due to higher regulatory compliance requirement and adding India as an additional sourcing destination.
Additionally, higher allocation towards rural spending in union budget is likely to benefit players in agrochemicals and crop protection.
After the initial hiccups in the 1HFY18 due to slews of government policy, we see some gradual recovery in the start of H2FY18. During 9MFY18, the sector has registered a growth of 11 percent which was largely led by 12% & 8% growth from the 2W & PV but in line from the pre demonetizations.
We expect the industry to registered 12 percent growth for FY19. We believe premiumisation in the 2W segment to continue followed by government push towards better road infra project and implementation of the scrappage policy will yield higher growth in the M&HCV sector.
Infrastructure is the growth driver of the economy. With the increased total capital outlay for infrastructure to Rs5.97lakh cr for FY19 and development of 35,000km of roads under phase 1 of Bharatmala will keep the outlook positive.
Increasing focus of pharmaceutical companies to domestic market coupled with rapid urbanisation and consumer spending is giving a positive outlook for the sector as the market size is poised to grow to US$100 billion by 2025. Recent promotions given by the government to the healthcare segment will add to the performance of the sector.
The outlook for the Indian IT sector is cautiously positive in 2018 as challenges remain amidst prospects of greater IT spending with global and US economy improving.
We expect that the early sign of recovery will lead to higher spending in the US banking sector which will result in revival in the BFSI.
Robust growth in the digital platform also indicates higher utilization in the large cap IT companies. We have a Hold rating on these companies valuing at a 5 years historical average.
Q) Top 4 stocks which you think could turn multibaggers in the next 2-3 years?
UPL has achieved healthy revenue CAGR of 16 percent over FY12-17, with stable EBITDA at 17-19%, despite widespread changes in regional weather patterns or swings in commodity prices and currencies.
We expect PAT to grow at a strong CAGR of 14% over FY17-19 led by new launches in fast-growing geographies, backward integration, and sustained market share gains.
UPL, a leading global manufacturer of crop protection products having a presence across the agri-input value chain from seeds to post-harvest chemicals will be a key beneficiary from government higher allocation towards rural spending.
Ashok Leyland (AL) is the second largest commercial vehicle (CV) manufacturer in India. It has a strong presence in the M&HCV (Heavy Commercial Vehicle) segment with a market share of 34 percent as on FY17.
We believe AL to witness numerous tailwinds like Government’s road & infra spending, the strategy of defence and electric vehicles.
We expect AL’s revenue to grow at 18 percent CAGR over FY17-20E- factoring 11 percent volume growth in M&HCV and 22 percent in its LCV business.
Order book continued to remain strong @ 2x TTM revenue and total outstanding order book stands at Rs 3,333cr as on Q3FY18. During the quarter KNR has received an order of Rs560cr in the state of Telangana for irrigation works.
We expect execution will ramp up going forward as most of the projects are now operational which continue to construct growth. Further, Government’s strong focus on developing road projects will keep the sector outlook positive.
With the acquisition of branded formulations business of Unichem Laboratories, Torrent is expected to strengthen its presence in the domestic market with further expansion in the chronic portfolio. In addition, recovery in US business will drive their growth going ahead.
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