Best days for NBFCs are over for now: Ashutosh Tiwari of Equirus Securities

Unlike 2017, the domestic equity market has been extremely volatile this year, thanks to a slew of global as well as domestic factors. Ashutosh Tiwari, head of research at Equirus Securities shares his views on the recent developments in stock markets, currency depreciation and his sector/stock preferences with Swati Verma. Edited excerpts:

Where do you see Sensex and Nifty by the end of this fiscal? 

We don't have any target for Sensex and Nifty as such, but feel indices are unlikely to give positive returns by the end of this fiscal. Increasing crude prices combined with rupee depreciation will hit margins of a lot of companies. As a result, earnings cut are likely over the coming quarters. 

During the last one year, when FIIs were continuously selling, domestic flows supported the market (SIP flow was very strong). Since last few months, SIPs have also started coming down. Retail investors are more influenced by near-term return and as for most of the funds last one year, SIP would not have given good returns, SIP inflows are likely to moderate going ahead, putting further pressure on markets.  

Are there any triggers that can support the markets?

On the global front, a lot of funds have been underweight on emerging markets, including India since last few months. Along with that, the kind of currency depreciation that we have seen coupled with crude prices affecting our macros, the pain is likely to persist. That apart, things look quite uncertain on election front because there is no clarity who will win the election next year. So, the upshot is that there is no positive trigger, as of now to support the market.

Rupee seems to be in a free fall. Despite government intervention, there doesn't seem much respite. What's your view here?

We have witnessed this kind of fall in the past as well. Historically, if rupee depreciates, it depreciates very sharply and then remains stable for three or four years. We have seen that during 2013- 2014 and same thing is happening now. I don't have any particular levels, but I don't see a very sharp correction in the rupee from the current level. It may see a mild decline and then stabilise. 

What about banks?

We believe private sector banks are better managed than the state-owned lenders and, hence gaining market share. So, our focus is covering private sector banks and also NBFCs.  We like HDFC Bank after the fall. YES Bank is also a good buy. Of course, there is some issue related to Rana Kapoor’s tenure, but no institution is run by a single man. We are confident they will find a suitable candidate for the post and there is no long-term issue in the bank on the fundamental side. Some correction might come but I don't see any dramatic fall in the stock.

Will the Reserve Bank of India (RBI) hike interest rate this time?

I think it's quite likely considering the macro situation because with rising crude prices and rupee depreciation, inflation also goes up. 

Do you think correction in NBFC stocks was overdue? 

Yes, I think so. We have been highlighting since last year or so that valuation in NBFCs looks overvalued. When market is in euphoria, valuation keeps going up and nobody is concerned about that and then one shock is required. So, I think that shock has finally come in the form of sell-off in DHFL. In a rising interest rate scenario, NBFCs NIMs (net interest margins) will compress. Earnings profile will not look as good as it was at the time when interest rate cycle was benign. So, I feel this correction was kind of overdue and I feel the best days for NBFCs are over for now. 

Recent public offers by Garden Reach and Aavas Financiers received weak response from the investors. What’s your view on the primary market, given the present market scenario?

It’s a well-known fact that when markets (secondary) are good, people know that in case of IPOs, they will make good gains during listing as well. This was the reason behind record number of issues last year. But, in the current scenario, when people and funds are wary of taking new, small and midcap stocks as they want to go for only large caps, it will be tough for the new IPOs to come. It’s likely to see a very dry spell in the IPOs or QIPs, for next eight or nine months, for sure.

Is the time ripe to lap up mid- and small-cap stocks given their relative under performance this year?

The valuation in these segments has definitely come down but it is not across the board. So, one has to be choosy in the current market. You have to pick up the stock where valuations are good and you see earnings growth. So, I don't see across the board rally in small and midcap but some small and midcap companies are definitely reaching a good valuation level. But, one has to be selective for the next eight-nine months as no index is going to give you across the board return.

Top stocks and sectors you are bullish on?

We prefer sector and stocks which benefit from rupee depreciation. IT is one such sector. Recently, midcap companies have also corrected. Hence, it's a good time to enter these stocks. Among specific names, we like AIA Engineering, KPIT Tech, Amara Raja Batteries, Lumax Industries, and Sterlite Tech.