Investors worried over multiple issues from rising interest rates to inflation, and the Russian invasion of Ukraine had turned bearish on stocks this year. However, the euphoria seemed to have returned over the last couple of months. The benchmark BSE Sensex is again hovering around 60,000 level. What should investors do in this scenario? Vikram Kasat, head advisory at Prabhudas Lilladher, says there could be some correction over the next month and investors must hold some cash. But, overall, he expects a strong demand-led revival and feels Indian markets are headed for a long bull run.
Until a few months ago, we were talking about the Ukraine war, rising interest rates, inflation concerns, and supply-side issues. What has changed now that the market has become euphoric?
What has happened in the corporate results in the June quarter? First there was the low base effect (lockdowns in the year ago quarter). Companies passed on prices which affected the volumes and both these led to a year-on-year growth of 39 per cent in topline and this has even beaten our estimates by 0.6 per cent. Commodity prices had hit all-time high, which helped companies operating into sectors like refineries, power, and gas. They reported 20-30 per cent YoY growth.
There was uncertainty of rising interest rate, uncertainty of weak rupee, uncertainty of logistics, metals, and crude. There were margin pressures too. But that has changed into the price effect. Also, what came suddenly is demand, which came into India on a big scale. So, once cost pressure eases out, a sharp recovery can be expected in demand, cash flow and topline across sectors. As of now, the larger demand outlook seems encouraging.
We see auto and banks on the front-lead now. We see there are still big pockets within auto like Mahindra and Mahindra, and Tata Motors. The commercial vehicle market is in the midst of cyclical recovery. The agriculture income will started coming in October-November, so the rural demand will also come back.
So, whatever problems are there, India’s economy will see strong demand-led growth. The luxury demand is there, auto demand is there; look at QSR (quick service restaurants), Westlife (the operator of McDonalds fast food chain) reported beautiful results. It has been one of our top picks and could double from here. So, at this level of the index also there are pockets where you can make money.
Talking about demand, fast moving consumer goods (FMCG) companies are still reporting pressure on volumes. What is your view on that sector?
In FMCG, companies like Britannia got affected because of the rise in palm oil prices and rural demand lagging urban. But, companies like Nestle and Dabur have also had strong price-led growth of 12-15 per cent YoY. The commodity prices are cooling off, palm oil prices have also fallen. While in companies like Britannia there may be pressure for two-three quarters, I don’t see major downside from here on. Companies like Hindustan Unilever, Nestle still look good from here. In the near-term, the industry may face cost-related pressures. But in the long-term, the rural growth will drive.
The BSE Sensex has rebounded and is back over 59,000 levels. What would you do from here on, be cautious and wait or remain fully invested?
We are suggesting clients should hold 10-15 per cent cash, cut down from the portfolio, not to leverage from here on for sure and we want clients to be on the cautious side right now. Don’t go by the euphoria and buy. We do see some correction happening over the next one month, so we will get a decent re-entry point. It will not be a major correction. But whenever the euphoria is back and everyone starts buying, its a good time to sell, wait for some time, wait for the consolidation.
Let us wait for another quarter to see which sectors are going to be best performers. So, even if I like auto and banks, my allocation should not go beyond 40-45 per cent right now. My auto allocation right now is somewhere around 12-18 per cent, banks around 20-22 per cent. For other sectors like IT, I will wait for one more quarter and see the results. Since we are talking of a lot of infrastructure development, we believe cement sector will do well.
You talked about the bullishness on auto. Is there a need to be selective, since two-wheelers are still in the slow lane?
We are not gung-ho on the two-wheelers though premium two-wheelers should witness better volumes here on. We are betting more on the cyclical recovery and the commercial vehicle space. From that perspective, we like Mahindra & Mahindra, and Ashok Leyland. The dark horse would be Tata Motors. Domestically, Tata Motors has performed really well in the last two-three quarters, but we are worried about China part as we are hearing of Chinese economic slowdown.
The IT companies saw a lot of new business during the pandemic. Is the market worried now that the recession that is being talked about in the US will hurt demand in next couple of years?
The employee costs and attrition rate for IT companies have gone up a lot. Revenue growth lagged due to budget cuts owing to inflation and interest rate hikes. These factors will hover dark on the balance sheets of IT companies. The deals were muted, the US banks are not in that good shape. One more challenge that needs to be watched out for is their contracts prices growth. I don’t see a huge downside, but don’t think anyone will make money in the IT space as of now. You will have to wait for two-three quarters in the IT space.
You see fund flow moving out from IT stocks into other sectors?
It has already started moving into sectors like auto, cement, and banks. Recently, pharma and real estate has been doing well. People are buying larger homes due to the pandemic, so the demand will be good. So, real estate will be a good play from here on. We like DLF and Oberoi Realty in this space.
Wouldn’t rising interest rates have some impact on the real estate sector?
There were some pockets where early bookings were made a lot due to stamp duty cuts. That has cleared lot of inventory. That will help in the near-term. That is one of the trigger. Employees in the IT sector got huge salaries and bonuses; they are also shifting homes. The demand will come from that side also. In cities like Mumbai and Bengaluru, rental yields are also moving up, not only on the commercial side, but on the residential side as well. Commercial real estate should also see a good pick up.
Since you are talking about real estate, what is your view on paint stocks?
This is a sector we would like to highlight. Since crude oil prices have come down, its a good time to be in stocks like Asian Paints and Berger Paints. The recovery in real estate sector, government spending on infra and continued growth in affordable housing should help.
What makes you so bullish on banks?
Whenever inflation is up and interest rate hike scenario is there, banks are the best performers. Interest rate rises will get passed on. Also to note is that banking stocks did not perform in the last two years. The Nifty index was moving well ahead of the Nifty bank index. It is catching up now. Some of the private banks have already moved up a lot. Stocks like ICICI Bank are at new high. I feel the next rally will come in public sector banks.
PSU banks have been underperforming for almost a decade. But, now that NPAs (non-performing assets) are reducing, PSU banks should do well. But we will be sticking to top two-three names. We believe next three-four years will be pretty well for the PSU banks.
Also, a thing to note is that FIIs were selling stocks like HDFC, HDFC Bank, Bajaj Finance and Finserv. But post the stock split and bonus announced by Bajaj Finserv, the stock has rallied. Once the picture of HDFC-HDFC Bank merger gets clearer, buying would come in that pocket also. So, where FIIs were bearish, they will come back.
What is your view on the likes of Paytm?
We look at internet stocks from a trade kind of only. I don’t believe they will yet have a huge spike. There will always be trade opportunities based on valuations. At Rs 40-42, Zomato was a good value. Its already above Rs 60 right now. Paytm below Rs 500 would be a good valuation bet. In the internet stocks space, I would see Nykaa at this level. But, I won’t go gung-ho on Paytm. Rather than Paytm, I will go for the likes of Bajaj Finance.
Where do you see the benchmark indices over the next 12-18 months?
I see Nifty 50 around 19,500 by December (it closed at 17,577.50 on Aug. 23). So, there is still a 12-14 per cent jump from here. But, we would be very selective and focus only on the top franchisees. I think whatever macro problems were there for India, the worst period is over. We are going towards a huge bull run, not for 1-3 years, but kind of a decade. There is a huge problem in China, Europe is in a crisis, US also has growth challenges. So, India has its chance. But, we will have a thematic play. Around 70 per cent will be in our core sectors that I mentioned, and even there, the top two-three companies, and 30 per cent will be the satellite portfolio, where we will look at themes.
Last couple of months, we have seen the midcaps and smallcaps outperform the large caps. Would you venture there?
I don’t want to jump in mid and small and micro caps at this level. There is no much juice right now in the midcaps. The movement is based on thematics. For instance, due to the power crisis in Europe (leading to paper supply constraints due to closure of plants), the domestic paper stocks moved up. Look at West Coast Paper, it has moved from around Rs 300 to over Rs 540 now in past one month. So, you won’t go and jump in the midcap space at such valuations.
