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Markets have had some sort of a rally in the last two months, especially after the corporate tax cut, We have been in an uptrend and more importantly in the last six odd months, we have also seen midcaps coming back in vogue. Clearly, there is anticipation leading up to the Budget and expectations are running high this time, given the fact that the economic growth has slowed down substantially and a lot is expected from this Budget as far as growth revival is concerned.
The market is expecting some short-term demand boosters. Some of the irritants like long-term capital gains tax are likely to go away and some push towards infrastructure activity as well, given what we have seen in the last five-six years. The gross capital formation of the economy has stagnated and in the last one and a half year, we also saw significant credit growth slowdown. The market is hopeful that this Budget will provide a short-term push from a growth perspective.
Which are the sectors where would you still see value? Are you going by the outlook on growth or are you looking at valuation play currently?
Valuation play has not worked in this market for the last two, three years. What has worked is growth in quality. We are very clear that this market will continue to be led by the BFSI segment. BFSI is now 42% of the Nifty and that is the only segment where there is growth in FY20. In fact, if you look at our Nifty estimates for FY20, ex of BFSI we are expecting a 2% profit decline for the full year. That tells us the dominance of BFSI in an overall aggregate earnings scenario. So BFSI is one space where we are very positive for the last two, three years. This is a consensus view but the consensus view has worked. Names like ICICI Bank have given stellar returns and have delivered decent numbers as well.
Apart from BFSI, where we remain very positive is consumer followed by IT. IT more from a hedge perspective is a high quality defensive. Also, incrementally some selected stocks in auto, pharma and cement. Those are the four, five sectors where we are very positive.
I would not call telecom a sector. It is a one stock sector right now. That has again been a significant overweight for us. Those are four or five sectors where we are incrementally more positive and at the margin we have increased the weightage of midcaps in our model portfolio over the last six months.
I see that a theme in terms of consumer discretionaries as well. Are there specific stocks or a segment that you are looking at as well?
Within the discretionary pack, it is across the sectors. We like Titan. We like Voltas, ABFRL and Crompton. If there is an income tax cut which is expected and if it does come, then the discretionary pack will have a far greater chance of outperformance compared to the staples.
We are hoping for a little more broad-basing of the rally and little more participation from midcaps compared to what we have seen in CY18 and CY19.
We are hoping for a little more broad-basing of the rally and little more participation from midcaps compared to what we have seen in CY18 and CY19.-Gautam Duggad
Within the discretionary pack, our preference is more towards names like Titan, Pidilite, ABFRL, Crompton, Trent and Voltas. In those kinds of names and incrementally in auto, we have increased our weightage in the model portfolio. But it has to be a very stock specific action in auto. We like Maruti and Eicher and given that there is a big event ahead of BS-VI transition, one has to be extremely choosy and reassess the auto thesis after six months again. Discretionary is something which we prefer over staples at the moment.
In terms of return scenario,given where we are at, given the way markets have moved despite the fact that fundamentals are yet to catch up, what is the return scenario that you are going with at this point?
With Nifty at somewhere around 18-18.5 times on expectations of a significant earnings recovery in FY21, a case to build a substantial upside for Nifty is difficult. Having said that, markets are known to climb the wall of worry and if this is a bottoming out process as far as economic growth is concerned, then markets can continue to remain expensive.
We are hoping for a little more broad-basing of the rally and little more participation from midcaps compared to what we have seen in CY18 and CY19. Some part of that has already happened in the last three-four months. Risk appetite is slowly coming back. You are seeing liquidity back into the system and we are seeing some of the high frequency indicators as far as macros are concerned are showing signs of revival. If this process continues and if the Budget provides a further push, then markets will ignore the short-term valuations for the time being.
However, incrementally midcaps and slightly on the smallcap side, there are better chance of returns compared to just Nifty right now.
Given the fact that we have had quite a trickle in of earnings already, give us a sense as to how you have assessed the quarterly performance in Q3, which have been the key hits and misses?
Around one-fourth of the Nifty companies have reported earnings and there has been an in line kind of performance at a very aggregate level. So IT has met expectations, banks have met expectations but there has been certain stock specific management commentary which has not pleased the market so there is a clear case of a loan slowdown in some of the high quality franchises. Slippages continue to remain elevated for the corporate banks even as there is a hope that this will moderate going forward but credit cost has stayed elevated. Having said that incrementally we still feel that corporate banks are the way forward for the BFSI space. We have not seen any meaningful numbers yet from consumer sector or auto sector. Asian Paint has delivered double digit volume growth but that has come at the cost of realisation growth. But the earnings season has just begun yet.
One-fourth of the companies have only reported. So far there is no ugly surprises I would say. Numbers by and large have been in line whether you look at PBT or PAT but commentary incrementally has not changed substantially. Lot remains to be seen and this week we are seeing big consumer companies reporting and auto also starting to report, it will be interesting to hear their thoughts on the underlying demand not just in December quarter but incrementally how things have shaped up in the last 30 days as well.
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