#39;Expect market to consolidate in 11,200-11,800 range till election outcome#39;
If Nifty falls 5-7 percent from current levels before the elections then we can expect 14-15 percent upside in the second half of 2019. There could be upside rally in market only if BJP gets complete majority on its own which is not factored at current levels, Rusmik Oza, Head of Fundamental Research, Kotak Securities said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q: What is your reading on market considering current correction and consolidation after steep run?
A: Post the Pulwama incident, investor confidence in the ruling party has increased and FII flows have seen a sharp upsurge. While other emerging markets saw higher flows at the start of this calendar year, India was somewhere left out due to uncertainties of election outcome.
By March, FII inflows were more than Rs 50,000 crore, which has largely gone into ETFs and Nifty stocks. The Nifty forward PE has risen from below 16.5x to around 18x as of now, which means Nifty forward PE has risen from its 10-year average and gone up by around 10 percent. The forward PE leaves very little room for further re-rating. We expect market to correct slightly and consolidate between 11,200 and 11,800 till election outcome.
Q: How do you read Q4FY19 earnings expectations and will they spook markets?
A: We expect Nifty earnings to increase by around 30 percent in Q4FY19, which will be mainly led by the banking sector. Excluding banks, the earnings growth of Nifty in Q4FY19 is expected to be just around 5 percent.
On a broader basis, we expect earnings growth of capital goods, consumers, IT, oil & gas and pharmaceuticals to drive Q4FY19 earnings of Nifty. As usual, we expect Nifty to remain strong in the initial phase of earnings season due to robust results from banks, IT and consumer companies.
After digesting good results from banks and IT firm, disappointment could sweep in from poor results coming from other sectors by end of April and going into May.
Q: Which segment of financials are you betting on?
A: We are bullish on corporate banks and larger housing finance companies as they are ideally placed in terms of growth and valuations. Between Axis Bank, ICICI Bank and SBI our house expects earnings of these companies put together to improve from loss of Rs 8,887 crore in Q4FY18 to profit of Rs 11,199 crore in Q4FY19.
Earnings from other private sector banks could be mixed with HDFC Bank likely reporting around 16 percent YoY earnings growth and IndusInd Bank reporting YoY fall of around 37 percent.
We like housing finance companies as demand for residential properties is increasing, GST rates have fallen sharply and interest rates are coming down. Name like LIC Housing Finance trades at 1.6x FY20 book value with return on equity profile of around 16 percent and likely earnings growth of around 17 percent in FY20E.
Q: Are autos or auto ancillaries worth looking at right now after sharp correction in last one year?
A: We would recommend investors to look at automobile companies only after Q4FY19 results. The slowdown in the sector is spread across all the segments, which could lead to negative operating leverage and disappointment in EBITDA margins.
Valuations of leading automobile stocks has moderated but they aren’t cheap or massively below their 10-year averages. We can expect earnings downgrades in auto stocks post Q4FY19 results which could make valuations look expensive as compared to current forecasts.
Investors can look at accumulating auto stocks if they correct 5-10 percent from current levels as there are chances of volume growth resuming post elections. Expect inventory levels to also moderate in the next few months.
Q: Do you expect broader markets to outperform in second half of 2019?
A: We expect markets to consolidate post election results as valuations are on the higher side and one year potential upside is in single digit. The risk-reward ratio of Nifty is not favourable at current levels.
If Nifty corrects 5-7 percent from current levels before the elections then we can expect 14-15 percent upside in the second half of 2019. There could be upside rally only if BJP gets complete majority on its own which is not factored in the market at current levels.
Q: Consumption has tapered in the recent past. Do you expect a pick-up in consumption in second half of FY20 especially after elections?
A: We have seen serious slowdown in all segments of consumption from automobiles to consumer durables. GST rates have been modified for many consumer related products, which will be positive for consumer durable companies in FY20.
We expect consumption to pick up post elections due to lower base and phasing out of inventories in the system. However, we have less comfort on consumer companies as valuations are extremely rich and scope of re-rating is very less in them.
Q: Crude spiked to $ 71 a barrel. Will it dampen the market sentiment?
A: India’s crude oil import dependence to oil consumption is 81-83 percent which makes us highly sensitive to crude oil price movement. Every, $ 10 per barrel increase in oil price results in a sensitivity of $ 14.6 billion to the import bill i.e. around 53.5 bps (basis points) of GDP.
In 2019 till date Brent crude price has increased by 32 percent and is trying to break to 200 DMA placed at $ 70 per barrel. Brent crude remains in a bullish phase and if it sustains above the 200 DMA ($ 70 a barrel) for few weeks then it has the potential to go to $ 80/bbl.
Considering the recent currency appreciation we feel India’s oil imports could rise to around $ 152 billion in FY20E as compared to $ 139 billion in FY19E. This could have a negative impact on currency, CAD, BoP and the fiscal deficit, which in turn will be negative for equity market and foreign flows.
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