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Midcap valuations down to 2014 PE levels, there are sector-specific opportunities: IIFL Securities

Mumbai | November 09 2018 13 : 31 IST | Moneycontrol.com

On a short-term basis, the market will remain volatile as domestic liquidity and global macros will keep on posing new challenges.

The valuations of many small and midcaps have moderated. While one can't deny a further downside, select themes and companies already look attractive, Arindam Chanda, CEO, IIFL Securities, said in an interview with Moneycontrol's Kshitij Anand. Edited excerpts:

Q) What is your target for Sensex and Nifty till next Diwali and why?

A) The market is recovering from extreme weakness seen in September as well as October. As we enter into November, the outlook is somewhat optimistic, backed by some good corporate earnings numbers and gradual improvement in sentiments.

We would expect about a 10 percent increase in Nifty from current levels. However, if a stable government is formed at the center, corporate earnings growth continues and global crude prices soften, the return could be much more attractive.

On a short-term basis, the market will remain volatile as domestic liquidity and global macros will keep on posing new challenges.

Q) Sensex and Nifty are slightly positive from last Diwali to this Diwali, but the big carnage has already happened in small & mid-caps. Do you think the selling pressure will continue in the broader market?

A) The marginal upside in Nifty is largely driven by just 5 stocks i.e. Infosys, TCS, Reliance Industries, ICICI Bank and HDFC Bank. Whereas the carnage in mid and small cap stocks was caused by mutual funds' selling owing to the new categorization of MF schemes, GSM/ASM circular of SEBI, change in equity taxation, etc.

In addition, liquidity crisis led by IL&FS default was extended to other NBFCs, which were already reeling under increasing interest rate environment.

The valuations for many small-cap and mid-caps have moderated. While one can't deny a further downside, select themes and companies already look attractive.

Valuations have corrected to 2014 PE levels whereas any new investor will look at a forward PE of 2020 to invest now. Considering good demand and steady pricing power there will be many sector-specific opportunities in midcaps.

Q) What are the major factors which will impact markets till next Diwali?

A) The things I would watch keenly or worry about in terms of risks till the next Samvat are an expected significantly higher fiscal deficit number, hardening bond yields.

Global macros such as oil, dollar will keep on influencing many domestic factors in India but at the same time, international trade tensions may not impact India as much some other major emerging markets.

Q) Top five stocks which investors could buy with an investment horizon of 2-3 years?

A) Some of our long-term recommendations include:

1) Mindtree with a year’s target of Rs1081,

2) Motherson Sumi with a target of Rs293,

3) Reliance Industries can be a unique play considering its futuristic endeavors while margin is improving in its core business, Jio is demonstrating robust subscriber addition and steady improvement in profitability.

4) We are also bullish on large private banks with strong liquidity. With an expectation of loan growth and better spreads compared to NBFC sector Banks such as ICICI Bank, Axis Bank should be included in the portfolio. One can expect a return of over 20-30% from them over long-term.

Q) Which sectors are likely to remain in focus till next Diwali?

A) The sectors with positive outlook include Private sector bank, select Pharma and IT stocks.

Q) What should be the ideal portfolio construction methodology for investors for Diwali 2019? (Age of investors is 35-40 years)

A) At the current scenario, a moderate risk taker may rebalance with incremental allocation towards debt. Yields might remain stubborn in foreseeable future so one can look at 30-40% allocation in various income streams of debt papers.

Increasing Equity exposure to 50-60% gradually by using up the portfolio cash will ensure that one never misses on favorable domestic growth stories. Holding Gold ETFs can give a good cushion against a volatile global geopolitical situation and is a cost-effective way to own yellow metal.

Q) What is your advise to investors this Diwali considering the fact every trick in the book seems to have failed to protect portfolio destruction?

A) For retail investors, systematic investment plan remains the best bet. Despite the market downside, one must continue with the SIPs of mutual funds managed by best Professional managers as historical data indicates sustained investment during these times ultimately helps in significant returns as bull-run begins again.

The bigger damage to portfolio happens when there are too many start and stops in between. Even if you look at Mutual fund during the 2008 financial crisis and 2-3 years post the meltdown you will find they have given stellar returns in spite of longer investment phase and moderate market returns.

Q) How are you reading September quarter results from India Inc. up till now?

A) The September quarter results were largely as per expectations. The corporate earnings are somewhat better than expectations and if the trend continues it would improve market sentiments significantly.

Although most of the midcaps results will be out in next fortnight or so, but based on the trend so far we can infer that revenue growth has been much better than the first quarter.

With the cost of capital shooting up during October'18 on the back of big liquidity crunch, select sectors may face a strong headwind in the current quarter on growth and profitability.

 

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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