Cement, IT, oil & gas and consumer durables are our preferred sectors: HDFC Securities

We think till elections, one's portfolio should be tilted towards largecaps. However, post elections, if things seem to be settling down well, gradual shift towards small and midcaps may be advisable, Deepak Jasani, Head Retail Research, HDFC Securities said in an interview to Sunil Shankar Matkar of Moneycontrol.

Edited excerpts:

Q: Do you think the current up move is a pre-election rally on the back of hopes of a stable government in May?

A: The up move since the middle of February can be attributed to a few factors. Politically, investors felt that the current ruling alliance has a better chance of coming back to power after the Indo-Pak tussle.

The announcement of election date on March 10 hastened this process. The US Fed changing its stance to dovish and postponing the balance sheet unwinding at its Jan 30 meet laid the ground work for the up move across global equity markets.

Another reason for the rise was that the Indian market had underperformed the other emerging markets until the middle of February in term of performance and flows. The market is recovering that now.

Q: Another key reason for the rally is the steady increase in FII inflows. What is your reading?

A: FIIs have increased their pace of buying in equities over the past few days. This can be explained by their growing expectations of a favourable outcome of elections and also the return of short-term FIIs who look at this event as an opportunity to make money in equities and F&O markets in a short period of time by trading on expected volatility.

DIIs may return to equity markets based on improving perception of stability post the elections. Also, investor-driven DII flows may happen in case new all-time high is registered on the Nifty/Sensex and the indices remain stable at those levels for a few days.

FII flows going forward over the next few weeks may be driven more by technical factors (driving the short-term FIIs into India) and global equity risk appetite changes.

Q: What is your outlook on earnings for FY19 and FY20?

A: Nifty earnings for December quarter hit an 11-quarter low at Rs 96.5 per share. This is the first instance since June 2016 when the earning per share has slipped below Rs 100. The divergence between estimates and actual EPS has been in the range of 14-21 percent in the last three quarters. The expected earnings per share for Nifty50 companies for FY19 has been downgraded to Rs 497 (growth of ~9 percent YoY). Earnings growth has so far not been able to excite market participants.

Nifty EPS forecast has been seeing downward revisions through the year over the last few years, and one is not sure whether the same situation will prevail even in the current year. With FY19 earnings turning out to be far lower than expectations, FY20 earnings estimates now stand reduced to Rs 630. Financials would contribute to more than 55 percent jump in PAT in Nifty EPS in FY20.

We think that although a favourable outcome of the elections would convince some FPIs to increase weight on India, the key worry about earnings growth will still persist till we have a slippage-proof banking system with improved liquidity enabling access to low rated borrowers as well.

Q: Are there reasons for domestic investors to bother about likely global growth slowdown and Brexit issues?

A: With India's exports as a percentage of GDP being less than 20 percent, the global slowdown will not have such a large impact on India's economy. Having said that the services exports could suffer in the event of a global slowdown impacting income and job creation in India.

Due to Brexit, auto components manufacturers such as Motherson Sumi, Mahindra CIE, Bharat Forge and the likes are going to be badly affected as the EU economy is expected to slow down, which will lead to a drop-in auto sales.

IT/pharma exporters may suffer due to the UK-EU uncertainty, but this may be partially offset by dollar appreciation in the immediate term. However, Indian IT companies fear re-negotiations for all ongoing projects. TCS, Tech Mahindra, Wipro and other Indian IT companies with European headquarters in the UK would need to spend on infrastructure and staff for setting up new offices in the EU.

Having said that, we don't think that Brexit (with deal or no deal) by itself is a big issue for the world; however, in conjunction with global slowdown and trade war, it could make some negative impact.

Q: With Nifty mid and small-cap indices already rallying 11-16 percent, is it still worth picking these stocks?

A: In H2CY19, we may see small and midcap space starting to perform and beginning to make good the underperformance seen in 2018. One has to be more selective in mid and smallcaps.

Q: What are the major themes that could give double-digit returns in the medium term?

A: Sectors we are comfortable with include cement, IT services, oil & gas and PSU (till just after the new cabinet settles down) and consumer durables. We think the NBFC space will see polarization with large well-established pedigreed players seeing buying interest even at high valuations while the rest of space seeing a lot of turmoil.

FMCG and auto space can be looked at lower levels. Banks may perform in line with the frontline indices.

While themes like insurance, city gas distribution, retail will keep doing well, one will have to be mindful of the valuations at the entry time so that the macro upside translates into micro upside for the investor.

 

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