We expect index stocks like Yes Bank, SBI, ICICI Bank, NTPC, Coal India, Vedanta Ltd and TCS to generate above index returns over the next four quarters, Sumit Bilgaiyan, Founder of Equity99 said in an exclusive interview with Moneycontrol’s Sunil Shankar Matkar.
Q: Market corrected sharply but do you expect it to fall further and then start showing strength ahead of Union Budget?
A: BSE Sensex’s PE has increased sharply from 24.0x in FY2019 to 28.3x in so far in FY2020. As banks will experience higher earnings growth due to peak provisioning being over driven by improving assets’ quality and some of the metal and mining companies performing better due to improved demand and realisations as the infrastructure spend is on the rise domestically, we believe the index may rise in the times to come and certainly can increase ahead of budget.
Q: Sensex took more than two years to hit 40,000 from 30,000 levels and created multi-baggers in the same period. Do you expect the index to take same period of time to hit 50,000 levels and what could be five stocks which could turn multi-baggers in the same period?
A: Rising oil prices and NPA mess in the banking systems, and structural reforms introduced by the government in terms of demonetisation and GST led to the markets reaching to 40,000 with a delay of two years as BSE Sensex constituents’ earnings remained at an average 5 percent during FY2017-FY2018 compared to an average 12 percent experienced between 2007-2014.
During FY2015-FY2016, the index EPS grew at a flat rate as the banks’ NPA issues started emerging on a bigger scale.
As the banking NPA issue is being largely resolved with RBI’s newly introduced measures towards recognition of stressed assets and National Company Law Tribunal (NCLT) driven NPA resolutions, indicate likely normalized growth returning to the banking industry.
Additionally, increase in the peak demand for power and improving coal supply by Coal India and cost cuttings indicate improved outlook for mining companies like Coal India and Vedanta and generation companies like NTPC.
We expect index stocks like Yes Bank, SBI, ICICI Bank, NTPC, Coal India, Vedanta Ltd and TCS to generate above index returns over the next four quarters.
Q: What is the risk factors market is ignoring currently as Nifty rallied from 10,600 to 12,100 when earnings came in mixed?
A: Major risks being ignored is the subdued consumer spend and lower retail inflation (excluding food). For the cycle to fully work out positively, besides government, the consumers also need to spend for which job and entrepreneurship growth drivers will have to be kept in place by the government
Q: Many experts said the auto stocks bottomed out and worst is behind? Do you agree and are you a buyer in Auto stocks?
A: The auto stocks are going through structural changes in terms of likely shift of a large number of vehicles on electric.
Now, the government has come out with a directive that three wheelers have to be electric from 2023 and two wheelers of below 150 CC have to be electric only by 2025.
This entail huge capex on the part of the auto companies and renders them vulnerable to following muted demand for internal combustion engine vehicles. Auto is a hold and should not be a new investment unless the price is right.
Q: As crude prices fell sharply to trade around $60/barrel would you like to take position in tyres, paints, chemical and OMC?
A: In case of tyres, it is the increased prices of natural rubber in both domestic and international markets which is the major concerns besides the slowing production in passenger vehicles (PV) and two wheelers (2Ws). Although the replacement demand may keep its sales rising, if exports are weakening can be concern for the tyre industry.
One can take exposure in stocks like Ceat as it is low on exports (12 percent of revenue), largely dependent on replacement markets (60 percent of revenue) and also has presence in growing CV industry segment. It has been able to maintain its profitability also despite headwinds faced in the OEM two wheelers and PV segments.
Paints, chemicals and oil refineries can be bought into given that crude oil prices have been lower in the past three months and are expected to remain subdued. The US’ total crude oil production is expected to reach new highs by the end of December 2019 and also due to weak economic growth expectations, the oil prices are expected to remain flat.
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