Mar 25, 2017 10:48 AM IST | Source: Chillicious.com
Equities remain one of the attractive destinations with better growth outlook than its major competing asset classes such as fixed income, real estate, gold etc.
We expect strong double-digit earnings recovery over FY18-19E which effectively puts Sensex target closer to 30,800 by CY17/FY18E, Pankaj Pandey, Head of Research, ICICI Securities, said in an exclusive interview with Kshitij Anand of Chillicious.com.
Below are the excerpts from the interview:
Q) What is your target for markets in the financial year 2018? Most analysts are concerned about valuations, do you think we will fall under our own weight if earnings fail to pick up or FII flows dry due to rising US bond yields?
A) Going forward, given the low base, stable commodity prices and revival of consumption led demand, we expect strong double-digit earnings recovery over FY18-19E. We assign a multiple of 16x on FY18E & FY19 average EPS (average of Rs. 1750 and Rs 2098) to arrive at a fair value of 30,800 as our CY17/FY18E target for the Sensex and 9,300 levels for Nifty50.
Given the flattish earnings are seen over the last 3-4 years, we understand that there remains scepticism over the recovery. However, with fundamental factors such as stabilised commodity base, upbeat consumption and most importantly, a favourable low base, we do believe that earnings growth would accelerate in FY18E.
On the flows front, channelisation of financial savings has resulted in strong domestic flows into equities. Strong domestic flows, therefore, is likely to aid Indian equities to withstand any volatility in FII flows.
Q) Your top five stocks which could become next multibaggers in the next 2-3 years and why?
A) Multibagger stock selection requires an investment horizon of 3-5 years, which is a challenging proposition. However, as a part of midcap and small-cap offering, we have a product line named “Nano Nivesh” wherein we recommend midcap and small cap stocks companies with good and scalable business models, dependable management and sound financials.
Our earlier recommendation such as Atul Auto, Siyaram Silk, Wim Plast, D-link, Apcotex Industries, CCL Products have been multi-baggers turning 2-9x over 4-5 years.
Our recent Nano Nivesh picks with scalable opportunities include Kanpur Plastipack, Prima Plastics, Bhartiya International, NCL Industries, Linc Pen & Plastics and Shree Pushkar Chemicals.
Q) What are the key risks for the market in the coming financial year?
A) The risks include a revival of competing for asset classes such as real estate, delay in earnings recovery and commodities volatility. If there is a sharp increase in commodity prices then we can underperform compared to other markets.
Q) Top five sectors which are likely to go limelight in the financial year 2018?
We expected domestic led sectors to do well in fiscal 2018 as consumption would be a key long-term driver. Sectors such as Auto, FMCG, BFSI (retail focussed) to hog the limelight for FY18.
Furthermore, Government’s focus on Job creation coupled with falling interest rate regime would drive the government spending on infrastructure sector, which would benefit the Infrastructure and Capital Goods companies.
Q) The mid and smallcap stocks have outperformed benchmark indices so far in the year 2017. Do you think the rally will continue for the rest of the year as well or there is a lot of froth developing? (valuation perspective)
A) We expect broader markets to keep performing given their superior growth trajectory which would keep their valuations at elevated levels. Therefore, under the scenario of ample domestic and global liquidity, the pockets depicting superior growth would keep attracting interest.
Q) December quarter results were not as bad as expected, but do you think March quarter results could spring an ugly surprise? What are your estimates for the March quarter?
A) Going in the Q4FY17, Banking, which has over 30 per cent weight in the index, would drag the growth a bit. During the quarter, given the hit that would be taken on treasury books owing to a sharp increase in yields during the quarter coupled with the delay in asset stress resolutions could weigh on results.
We also believe that pockets of consumption (discretionary) could have some impact of demonetisation. However, the earnings from hereon should provide a favourable base for a growth recovery in FY18E.
Q) What is your one advice which you want to share with your readers?
A) Equities remain one of the attractive destinations with better growth outlook than its major competing asset classes such as fixed income, real estate, gold etc.
We note that despite the attractiveness, there remains a huge scope of higher deployment of domestic savings into the equities from current levels of merely 1 per cent of GDP.
We recommend investing in quality names that have reasonable growth visibility coupled with strong balance sheets. We advise a staggered buying approach to build a long term portfolio.