Expect markets to be rangebound with heightened volatility in the near term, says Harendra Kumar of Elara Equities.
Our analysis shows that companies which have high profitability, high asset efficiency, and are low beta have outperformed over the last 3 months, Harendra Kumar, Managing Director-Institutional Equities at Elara Equities, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q: Do you think the recent development on the geopolitical front (military action by the US on Syria) could cap upside for equity investors across the globe?
A: Geopolitics has added to the already heady mix of macro headwinds-elevated concerns around increasing bond yields; fluid domestic political and fiscal policy environment; fear of a trade war between US and China; rising crude oil prices - facing the market.
This will add to market volatility. We expect markets to be range bound with heightened volatility, in the near term.
Q: Mutual Fund flows have slowed down considerably in the month of March thanks to global volatility. Do you think the reduction in DII flows would play in charting direction for our markets?
A: March saw a decline in DII flows after several months of strong flows. We believe the tax planning would have played a major part in the decline in net flows. We expect financialisation trend to continue and will be watching the flows over the coming months carefully
Q: Any stock/sector which you emerge as a dark horse in the year 2018 or FY19?
A: We expect metals and mining to outperform in FY'19 on the back of elevated commodity prices, high domestic demand and operating leverage.
Q: There were many quality stocks which corrected in the last 2-3 months thanks to global volatility. Any top contrarian stocks which investors can buy at current levels and why?
A: Our analysis shows that companies which have high profitability, high asset efficiency, and low beta have outperformed over the last 3 months.
Given the prevailing market conditions, we expect the same parameters to work over the near term. We like Indraprastha Gas, Ashok Leyland, TVS Motor, Crompton Greaves Consumer Electricals, Eicher Motors, Nestle India, Crisil, Amaraja Battery and Hindustan Unilever.
Q: Do you think March quarter earnings could be as strong as consensus estimates? What are your estimates for FY19?
A: March quarter earnings could be under-pressure, primarily due to higher provisioning that we are expecting from banks. We expect FY19 earnings to grow ~18-20 percent.
Q: Most foreign brokerage firms such as Citigroup and CLSA have trimmed their estimates for Sensex/Nifty for 2018. Have your also trimmed your Sensex or Nifty target for December-end?
A: We have December target of 11,400 on the Nifty. We will look at Q4 earnings closely before we take a call on revisions to our target.
Q: What is your assessment of the banking situation? It looks like new skeletons are coming out of the closet every day. Do you see PSU banks a potential long-term buy at current levels or investors should stick to private sector banks and NBFCs?
A: PSBs would witness issues on-balance-sheet growth, NPL provisioning, and core capital fronts. Only BOB and SBI would be relatively better off due to their focus on retail credit, higher provision cover and relatively better standing on core capital (CET I).
Among PSBs, better places would be BOB & SBI. Private banks (particularly retail focused ones) would post higher balance-sheet growth, legacy issues are less or negligible and profit growth would be much higher.
Private banks with corporate exposures would underperform. Apart from NCLT I & II lists, banks themselves are aggressively approaching NCLT/IBC for resolution of cases, which would be a drag for time being. Among private banks, we prefer IIB and CUBK.
On NBFCs, we recommend to go selective, given the current valuations. We prefer PNB housing among HFCs, JM as a diversified play and Shriram transport finance on vehicle financing side.
Q: The crude price shock has taken equity markets by a surprise. Do you think if the crude stays above USD 71/bbl it would spell trouble for the economy as well as OMCs?
A: If crude stay above USD 71/bbl, it will be negative for inflation outlook with associated impact on the fiscal situation. Industries like paints may have a negative impact on earnings outlook.
In rising crude oil scenario, the governments would like to cushion retail customers through reduction of excise duty, but at the same time, it would like OMCs to absorb the impact through lower margins or delay in price hikes.
OMCs might additionally be impacted due to higher dependence on government subsidies, which if delayed will lead higher interest expenses. However, we expect crude prices to cool down and stay within USD 60-70/bbl range.
Q: Midcaps are trading over 70 percent premium (in terms of PE) to Nifty. Do you think this premium could actually narrow down in 2018 and possibly in 2019?
A: We see a risk to midcap premiums over the next year. Within midcap, we like low leverage midcaps stocks with earning visibility for the next two years; high quality – efficient management, top brands, industry leadership, first mover advantage; and those with location advantages (eg. like in cement).
Q: Any secular story which you are tracking? Are there any businesses, which are trading at a fair price – Great business at a good price which is seldom seen?
A: Rural consumption and public capex are the two themes that we like. Quality companies associated with these themes are likely to outperform.
Coming to businesses, our analysis shows that the value markets ascribe to long-term earnings (beyond the next 2 years) is at its highest levels. At the same time, we are seeing near-term earnings (next two years) visibility expanding for the market overall, and in most sectors.
Given this, businesses with high near-term visibility that derive more value from near-term earnings will be attractive. Energy, Utilites and IT are spaces where one could focus.
Q: Do you think the recent development on the geopolitical front (military action by the US on Syria) could cap upside for equity investors across the globe?
A: Geopolitics has added to the already heady mix of macro headwinds-elevated concerns around increasing bond yields; fluid domestic political and fiscal policy environment; fear of a trade war between US and China; rising crude oil prices - facing the market.
This will add to market volatility. We expect markets to be range bound with heightened volatility, in the near term.
Q: Mutual Fund flows have slowed down considerably in the month of March thanks to global volatility. Do you think the reduction in DII flows would play in charting direction for our markets?
A: March saw a decline in DII flows after several months of strong flows. We believe the tax planning would have played a major part in the decline in net flows. We expect financialisation trend to continue and will be watching the flows over the coming months carefully
Q: Any stock/sector which you emerge as a dark horse in the year 2018 or FY19?
A: We expect metals and mining to outperform in FY'19 on the back of elevated commodity prices, high domestic demand and operating leverage.
Q: There were many quality stocks which corrected in the last 2-3 months thanks to global volatility. Any top contrarian stocks which investors can buy at current levels and why?
A: Our analysis shows that companies which have high profitability, high asset efficiency, and low beta have outperformed over the last 3 months.
Given the prevailing market conditions, we expect the same parameters to work over the near term. We like Indraprastha Gas, Ashok Leyland, TVS Motor, Crompton Greaves Consumer Electricals, Eicher Motors, Nestle India, Crisil, Amaraja Battery and Hindustan Unilever.
Q: Do you think March quarter earnings could be as strong as consensus estimates? What are your estimates for FY19?
A: March quarter earnings could be under-pressure, primarily due to higher provisioning that we are expecting from banks. We expect FY19 earnings to grow ~18-20 percent.
Q: Most foreign brokerage firms such as Citigroup and CLSA have trimmed their estimates for Sensex/Nifty for 2018. Have your also trimmed your Sensex or Nifty target for December-end?
A: We have December target of 11,400 on the Nifty. We will look at Q4 earnings closely before we take a call on revisions to our target.
Q: What is your assessment of the banking situation? It looks like new skeletons are coming out of the closet every day. Do you see PSU banks a potential long-term buy at current levels or investors should stick to private sector banks and NBFCs?
A: PSBs would witness issues on-balance-sheet growth, NPL provisioning, and core capital fronts. Only BOB and SBI would be relatively better off due to their focus on retail credit, higher provision cover and relatively better standing on core capital (CET I).
Among PSBs, better places would be BOB & SBI. Private banks (particularly retail focused ones) would post higher balance-sheet growth, legacy issues are less or negligible and profit growth would be much higher.
Private banks with corporate exposures would underperform. Apart from NCLT I & II lists, banks themselves are aggressively approaching NCLT/IBC for resolution of cases, which would be a drag for time being. Among private banks, we prefer IIB and CUBK.
On NBFCs, we recommend to go selective, given the current valuations. We prefer PNB housing among HFCs, JM as a diversified play and Shriram transport finance on vehicle financing side.
Q: The crude price shock has taken equity markets by a surprise. Do you think if the crude stays above USD 71/bbl it would spell trouble for the economy as well as OMCs?
A: If crude stay above USD 71/bbl, it will be negative for inflation outlook with associated impact on the fiscal situation. Industries like paints may have a negative impact on earnings outlook.
In rising crude oil scenario, the governments would like to cushion retail customers through reduction of excise duty, but at the same time, it would like OMCs to absorb the impact through lower margins or delay in price hikes.
OMCs might additionally be impacted due to higher dependence on government subsidies, which if delayed will lead higher interest expenses. However, we expect crude prices to cool down and stay within USD 60-70/bbl range.
Q: Midcaps are trading over 70 percent premium (in terms of PE) to Nifty. Do you think this premium could actually narrow down in 2018 and possibly in 2019?
A: We see a risk to midcap premiums over the next year. Within midcap, we like low leverage midcaps stocks with earning visibility for the next two years; high quality – efficient management, top brands, industry leadership, first mover advantage; and those with location advantages (eg. like in cement).
Q: Any secular story which you are tracking? Are there any businesses, which are trading at a fair price – Great business at a good price which is seldom seen?
A: Rural consumption and public capex are the two themes that we like. Quality companies associated with these themes are likely to outperform.
Coming to businesses, our analysis shows that the value markets ascribe to long-term earnings (beyond the next 2 years) is at its highest levels. At the same time, we are seeing near-term earnings (next two years) visibility expanding for the market overall, and in most sectors.
Given this, businesses with high near-term visibility that derive more value from near-term earnings will be attractive. Energy, Utilites and IT are spaces where one could focus.
