The normalisation of the Indian economy from the COVID-induced restrictions augurs well for banks and financial services sector with a rise in credit offtake and yields, believes Vinod Nair, Head of Research at Geojit Financial Services.
“We suggest a large-cap like HDFC Bank which is available at moderate valuation and business is likely to rise in the coming quarters,” he shares at an interview with Moneycontrol.
Given the moderate expectation on future market return and high volatility in the short-term, the veteran equity research professional suggests defensives like Infosys and online-based businesses like Info Edge.
Excerpts from the interview:
What is your reading on the market (gaining more than 36 percent) from last Diwali 2020 and how will it look like by Diwali 2022?
The future returns are expected be moderate, compared to the marvellous performance in the last one to two years. It will be due to the normalisation of valuation and liquidity in the market. After some consolidation, during in this phase of transition, we can expect the market to move towards new highs. On a medium-term basis, 17,500 to 17,000 on the lower side and 18,100 to 19,000 on the upper side will be important levels.
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The Midcap and Smallcap indices outperformed the frontliners, rising 65 percent and 77 percent from last Diwali. What is your outlook by the next Diwali?
Our outlook is subdued on a short-to-medium-term basis and it will have a higher impact on mid and small caps. We anticipate moderate performance in the one-year forward basis with constructive view on a stock to sector basis.
All sectors participated in the market run from last Diwali. What are the sectors that could be in the limelight by Diwali 2022 and why? Do you think Bank Nifty will cross 50,000 by then?
On a near-to-medium-term basis, we are positive on defensive sectors in anticipation of a higher market volatility. Sector wise, we are positive on those which are bound to gain from the full re-opening of the economy like tourism, the capital goods and infra benefiting from the fiscal push, and power (renewables) and manufacturing benefiting from the reforms initiated by the government. We are also positive on banks because a rise in yield and growth in credit will lead to re-rating of valuation and support to reach higher in 2022.
The primary market saw record fund raising and record number of IPOs from last Diwali. Do you expect the momentum to continue?
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We should expect the rate of IPO funding to moderate in the short term in line with the trend of the market. However, the view is optimistic on the medium to long term with India being the biggest fast-growing economy in the world. This is also supported by a reformist government agenda and rise of start-ups.
What are the top five key events that will support the market sentiment and top five risks that can spoil it by Diwali 2022?
I would list the key supporting factors as
1. A fast-growing large economy and rise in FDIs (foreign direct investment).
2. Reforms undertaken during last 1-3 years especially like cut in corporate tax, manufacturing, PLI (production-linked incentive) schemes, restructuring in power sector with focus on renewable energy will help a lot in the future.
3. Change in global outsourcing strategy to have a diversified location of supply with China plus one strategy.
4. Rise of domestic unicorns.
5. Further re-opening of the economy and fiscal spending.
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The key risks ahead could be the following
1. Normalisation of the financial market by reversal in QE (quantitative easing).
2. High valuations.
3. Reduction in FIIs in the short-term and a possible fall in retail inflows.
4. High stagflation impacting corporate profitability.
5. Rise in interest yield.
What would you suggest the investor to go for – the Paytm IPO or the Sapphire Foods IPO?
Both are very expensive and are loss-making companies which is expected to continue at least in the medium-term. The offers are aggressively priced. However, they are great brands with positive outlook on long-term basis. A short-term investor may take a chance with a target only on listing gains.
What are those two stocks that you are bullish on for the next one year or by Diwali 2022?
We are very positive on banks due to normalisation of the economy, rise in credit and yield. In that, we suggest a largecap like HDFC Bank which is available at moderate valuation and business is likely to rise in the coming quarters.
Given moderate expectation on future market return and high volatility in the short-term, we also suggest defensives like IT sector in which we suggest Infosys and online based businesses like Info Edge.
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