Given the sharp up-move in the last two months, one should be very cautious for the short term as there could be a small dip in the markets, however, the correction should be looked at as an opportunity to buy quality stocks for the long term, says Sandeep Bhardwaj, the CEO of Retail Broking at IIFL Securities.
“Technically, we were never in a bear market. It still continues to be a healthy bull market,” the upbeat financial expert, seasoned in strategic planning, profit centre management and business development, shares in an interview to Moneycontrol.
Inflation seems to be topping out for now, with FY23 projection by the RBI remaining unchanged at 6.7 percent. “If the fall in crude prices continues with a predicted normal monsoon, one can see inflation cooling in the short term, but globally we believe that the fear of rising inflation is not out of the woods considering the medium-term outlook,” he says.
Excerpts from the interview:
Considering the changing environment, do you think the BSE market capitalisation will surpass Rs 350 lakh crore in the next calendar year?
The Sensex was trading at 60,000 levels when it hit a market cap of Rs 280 lakh crore. For a Rs 350 lakh crore market cap, the Sensex is required to reach 75,000 levels. With our FY24 index EPS (earnings per share) estimate of Rs 3,059, the valuation comes to 24.5x of FY24 earnings.
We believe that this valuation would be too optimistic as global headwinds won’t support such rich valuations. We expect that the index will consolidate near the Rs 300 lakh crore market cap in the next calendar year which would lead to the Sensex reaching around 65,000 levels and trading at an earning multiple of 21.2 x of our FY24 EPS estimates.
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Do you think the falling inflation on a sequential basis is clearly backing the market rally? Do you expect the actual inflation print to undershoot RBI inflation forecast in the second half of FY23 and FY23?
Lower inflation, coupled with FII turning buyers and rupee strengthening, had lifted the investor sentiment. Inflation seems to be topping out for now, with FY23 inflation projection by the RBI remaining unchanged at 6.7 percent. However, this is still beyond the upper tolerance level.
But one needs to look at the basis of this projection – normal monsoon and crude at $ 105 a barrel. If we look at crude, it has cooled off from $ 105 a barrel to $ 94 a barrel. If the fall in crude prices continues with a predicted normal monsoon, we can see inflation cooling in the short term.
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But globally, again the situation in Europe is concerning, as European Union carbon price hits record high as the gas shortages are leading to more demand for coal for power generation. Europe’s benchmark electricity price is now trading at 500 euros per MWh for the first time ever. This time last year, the German year-ahead power was about 85 euro. Hence we believe that the fear of rising inflation is not out of the woods considering the medium-term outlook.
Considering the consistent inflow for last several weeks, do you think FIIs got a sense that the worst related to inflation and policy tightening is over now, and recession is only a fear?
FIIs have not even bought back 10 percent of what they sold since last year so we should not get too excited. And downplaying a recession is too early – the UK recorded a 10.1 percent inflation for the month of July, a double-digit figure for the first time since 1982. Also, the US home sales fell 5.9 percent in July compared to June leading to a sixth consecutive MoM decline and down 20 percent from a year ago.
So technically, the US might already be in a housing recession. Hence, it is too early for not fearing the recession. However, we believe that the FII buying trend should continue in India as they do not have any large investable destinations other than India.
The European countries are struggling with inflation, the investors would not invest in Russia due to the war, China is facing a slowdown, and other developing countries are needing bailouts.
India is likely to be the fastest growing economy in FY23 with almost zero chances of recession. Hence, they are putting money in India considering it is a much safer bet currently compared to other markets.
Do you see the current spike in the market as a bull market rally or is it still a bear market rally? Do you foresee another 10-odd percent run by FY23-end?
The difference between a bear market rally and a bull market rally is difficult to spot. The breadth data gives us a clue. In the S&P 500 the recent thrust to 88 percent is in line with a new bull market, and the index has retraced more than 50 percent of its losses which was not a characteristic of previous bull market rallies.
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Unlike its global peers, the Nifty corrected 18 percent from its all-time high to make a low of 15,183 after reversing in June. So technically, we were never in a bear market. It still continues to be in a healthy bull market and now we are just 3 percent away from the all-time highs.
However, with such a sharp-up move, currently, the Indian market has definitely entered the overbought zone on the daily time frame with RSI touching 84 levels recently. Hence one should be very cautious for the short term as one can expect a small dip in the markets, however, the correction should be looked at as an opportunity to buy quality stocks for the long term.
If you expect another 10-odd percent rally in the coming months, then what would be the sectoral drivers for this rally?
The odds of a 10 percent rally from here are not high as after a sharp recovery we expect a consolidation in the markets for now and a gradual up move later on. Looking at the sectors, banks continued to report a strong core performance in Q1FY23, with healthy QoQ loan and fee income growth, despite the impact of seasonality, largely stable core NIMs and continued improvement in asset quality.
Banks continued to hold additional balance sheet provisions, write-backs of which could further aid credit cost. Going forward, banks should gain from improving loan growth, flow through of rate hikes in May/June/August, operating leverage, and lower credit cost. The impact of increasing competitive intensity (as growth improves) on NIMs (net interest margins) and an uncertain macro and geopolitical environment, remain key risks. Our top ideas among banks are HDFC Bank, ICICI Bank, and SBI.
In infrastructure space, Q1FY23 witnessed healthy revenue growth for road contractors. Margins took a hit from higher raw material costs, but should gain gradually over balance FY23. Existing order book provides growth visibility for FY23-24. Fresh ordering will be keenly watched for moderation, in competition amid lower government grant for HAM and cap on bid capacity.
Considering the significant rally from the March lows, do you think the auto sector has priced in the expected festive demand?
We believe that the festive demand of the auto sector is not fully priced in yet. July 2022 auto volumes were strong, with current trends implying that industry volumes are on track to meet our FY23 growth estimates. Medium & heavy commercial vehicle (MHCV) SAAR (seasonally adjusted annual rate) moderated MoM, but is still on track to meet FY23 volume estimate (325k, up 35 percent YoY). Light commercial vehicle (LCV) SAAR at around 680k is significantly above our FY23 estimate (600k, up 25 percent YoY).
There is a sharp MoM jump in the passenger vehicle segment, implying that supply-side issues are easing. We estimate the 2-wheeler industry to have grown 9 percent YoY, driven by improvement in end-demand and channel stocking by select players heading into the festive season. We expect the 2-wheerl industry to grow 15 percent YoY in FY23.
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