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Do you think the market in the near term is going to be lacklustre and low volume as just everyone is on Christmas and New Year break?
The market has been lacklustre for the broader segment but Nifty is showing a very different trend and the problem of polarisation, which has been the talking point for CY18 and CY19, can continue for some more time till we see some evidence of the economy bottoming out and earnings broad-basing.
As of now, those evidences, if any are very sketchy. I expect the market to remain concentrated in a few pockets at least in the first half of 2020. After that, it remains to be seen how the earnings are panning out because the current numbers are factoring in a sharp recovery for FY21 earnings — almost 25% plus growth. We are starting the year on a very high note on earnings expectations, which if you can recall, for the last five years has been the case. But the ultimate reality is very different. If you assume 7-8% kind of cut on those estimates already, then at the index level, we are not seeing a very sharp possibility of up move given that you are trading at 17-18 times and obviously there is a polarisation on valuation also.
Fifteen stocks have been up 40% in the last 15 months. If you construct the Nifty of 15 stocks, it is at 14,500 whereas the Nifty of other 35 stocks are somewhere around 9,300. So, the gap is almost 50%. I do not expect much movement on the index level in the short term. Yes, if you see some buoyancy coming back in economy, midcaps can surprise this year.
Do you have a view on what RBI is planning with OMOs –a US style Operation Twist? They are going to simultaneously purchase and sell government securities for about Rs 10,000 crore each. What could this mean for the overall bond market?
This is the reaction to the lack of transmission that we have seen for the last 8-9 months as far as interest rates are concerned. We are all aware that 135 bps has been the cut in the repo rates and the transmission has been extremely slow. The 10-year G-Sec yield was reflecting that over the last six odd months.
Maybe, RBI is trying to bring the yields down a notch by going for Operation Twist and obvious beneficiaries will be the PSU banks, given that they are on a very large treasury portfolio. But it clearly shows that at some level, there is frustration with respect to the lack of transmission that we are seeing as far as the monetary policy is concerned. Obviously, it happens with a lag but the pace seems to excruciatingly slow right now. This is an attempt to hasten that pace.
You were also talking about the polarised nature of the index. How soon before we see a more broader participation even within the Nifty, forget the small and midcaps catching up?
If you see the Nifty polarisation of 12 stocks, you clearly see that earnings are also polarised. In the value-oriented stock or the value bucket, there has not been any earnings buoyancy, give or take a couple of names. Clearly, the polarisation in the stock performance at one level is also a reflection on the polarisation in earnings. Apart from other factors which are at play which is concerns over corporate governance, the flight to quality, the overall weak growth environment that we are seeing and several accidents as far as the debt related and plays related issues are concerned.
Fifteen stocks have been up 40% in the last 15 months. If you construct the Nifty of 15 stocks, it is at 14,500 whereas the Nifty of other 35 stocks are somewhere around 9,300.-Gautam Duggad
At some point of time, if you see earnings broad basing, that will be the first signal for the market to broad-base and when that happens, it is anybody’s guess. But at least, one silver lining in this dark cloud is that the banking asset quality seems to be improving.
In the second quarter FY20, we saw more evidence of fresh slippages moderating. It will take a lot of time because at the margins, we have seen consumption slowdown even in urban pockets while investment remains as stagnant as they were since FY12.
The incremental pain has come from consumption slowdown. If you look at last 8-9 months commentary, whether it is rural or urban — consumption has clearly slowed down. It is going to take some time if you see some evidence of growth bottoming out — both at the macro level and corporate earning level. The second half remains a very favourite term for all the analysts on the Street. It sounds like a cliché but the fact is unless and until, there is some improvement on the earnings front, the market can remain happily polarised.
How do you read into the turn of events with respect to Cyrus Mistry and the Tata Sons and in terms of the running of the overall business. I reckon it is not really going to impact the daily operations but how are you looking at the overall saga now playing out?
It is more of a legal and technical event rather than any big change in the group level strategy. Obviously, we will see how these events unfold in the next one one and a half month, when they appeal in the Supreme Court and the judgement is pronounced over there. But from a day to day running of the business if you read the commentary in media over the last 2-3 days, it seems that things are stable.
We cover 10 Tata Group companies in our universe barring one or two companies with high leverage and there are multiple restructuring/deals which are going on I think rest of the businesses can chug along well. For example, I do not see any issue with Titan, Trent, Indian Hotel or TCS for that matter. If at all, on the back of this news flow, this is the time to add those stocks. For example, we have been bullish on Titan and Trent for many years now and we continue to remain bullish on that space. Overall, I do not think this is going to hurt the business interest even though it might cloud the new space for some more time till the whole uncertainty as far as the legal issues are concerned are over. One will have to wait and see how the events unfold in the higher courts.
Are there any particular themes or stocks that you would go for within the midcaps?
The problem with midcaps is that there is no sectoral calls. You have to choose the stock on its merits. So, it is a pure bottom-up process and at the same time, it is very important to remember what not to do in midcaps rather than what to buy. So as far as we are concerned, our preference is still tilted a little more towards the discretionary consumption side and financials. For example, we continue to like AU Finance. We like some of the beaten down NBFCs as the funding situation is improving, a little bit cost of funds have gone down and as consumer discretionaries, we have our preference for a mix of auto and durable retail names like Crompton Consumer and Ashok Leyland.
We continue to like Indian Hotels. Trent or ABFRL are some of the names where we would like to invest. It is a long time before we will see revival over there. The better way to play that space is through cement which offers a relatively cleaner balance sheet and a relatively stronger management. In that space, our preference is towards players focussed on north and central where we are seeing pricing stability and improvement in utilisation. We like JK Cement in that pack.
So, those are some of the names that we like but clearly there are far more opportunities there. As you see the revival of risk appetite coming back, you will see the space turning far more buoyant than what we have been used to for the last two to two and a half years.
What is the broad expectation from what earnings are going to throw up come January? Is it going to be as tepid as the previous quarter or is there some chance of a revival?
It is way too early to say that. Our team is still speaking with various managements but my sense is earnings which are more or less similar to what we saw in the second quarter will see some base effects related play which will come into different sectors and obviously the tax cuts are going to make the profit after tax growth far better than what the growth is at the PBT level for example if I remember the second quarter FY20 we had seen Nifty PBT declined 3% but the PAT had grown 8%. If you look at my full year FY20 earnings estimate for the Nifty itself is at a EPS of around Rs 540, which is a growth of 12%.
In the first half, we have seen 6% growth. The expectations for the second half to do better are already there These are back in estimate and there will be some more downside risk to the earnings estimate for FY20 as well as we move forward given that things have slowed down further post September.
In fact, if I go by what my economist publishes on a monthly basis — which is the economic activity index — we have seen things slowing down in October and November as well. It is important to cognise for this the Rs 540 EPS that we have for FY20 on Nifty has some more downside risk left. But the market is looking beyond those issues as we have seen post the corporate tax rate announcement and also after the print of the second quarter FY20 GDP. The market is going for a much higher FY21 earnings growth on the basis of the reforms that the government has announced along with some of the other steps at the ground level.
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