 "Clear political mandate will be key catalyst to trigger capex recovery: Paras Bothra")
After a long period of low return the India equity markets, despite huge pessimism, have once again riding high. Jitendra Kumar Gupta spoke with Paras Bothra, who is VP, equity research at Ashika Stock Broking to understand these trends and his take on new bull market. He also shares some of his investment ideas and why he bullish from the 2-3 years perspective.
Do you think the markets have more room for the upside given the current valuations and fundamentals?
Market has decisively breached the all time high after almost 6 years on back of improving macro economic outlook and on expectations of a NDA government led by Narendra Modi coming to power.
So P/E, P/B and all other valuation multiples got de-rated on sub-par earning growth. Market at present is in the process of re-rating the valuation multiples on premise that the macro stability has been regained, NDA to come in power and earnings would start registering a growth above the nominal GDP average of 15%.
Generally a bull market starts at the throes of extreme pessimism (which we have seen in the last couple of years) and then gradually earning expectation starts improving amid skepticism and thereafter finally earning starts improving and drives the prices higher and finally PE re-rating happens.
At present it seems that the bull case scenario which is emerging for next couple of years is at a stage of expectation of earnings improving going forward. So if the premise on which the expectation is improving finally culminates into real earnings growth then naturally valuation doesn’t look expensive at all and there is more tailwinds in this rally.
How would you advise investors to act before the elections results? Is it right to load equity?
Invest in companies where corporate governance is good, i.e, first management pedigree needs to be checked and then valuation call needs to be taken. If these two things are set right, we need not have to worry about the wild gyration in stock prices and also for our capital safety. Though in the short-term election result to dictate the market and to take a call before a event which is fraught with risk is highly speculative and best way to play out is through options.
You have recent advised your clinets to buy companies like PI Industries and Va Tech Wabag? Can you tell us about these companies and your basic investment arguments?
Both PI Industries & Va Tech Wabag are leaders in their respective field and they has carved a niche in the product or services they render. Both the companies are consistently delivering growth and generating good cashflows and have good return ratios.
For Va Tech Wabag, management pedigree is good and they have experience of almost three decade in the water infrastructure business. This is a asset light business and generates good return on their invested capital and order inflow remaining robust and gives sound revenue visibility for Va Tech Wabag.
PSU stocks have started to move do you think there is hope or its just a sentiment rally? Do you like any stock in this space and why?
PSU stocks are moving because of their sheer undervaluation in most of the cases. Expectation of disinvestment once NDA comes to power is acting as a catalyst for them to come out of their undervalued quotes. We like majority of the PSU banks because we feel the stress in the banking system as far as the bad assets are concerned is done with and NPA cycle is in the process of bottoming out (which seems to be the major valid reason for their underperformance and undervaluation in these stocks) and majority of stocks are trading at less than one times p/b and with dividend yield of closer to 5%.
Apart from the banking stocks, we like Engineers India, BEL, Concor, NMDC, MOIL, Balmer Lawrie, SAIL and other cyclical stories in this space where the stocks are trading at a discount to their fair value because of downswing in the economic cycle. Expectation also remains high on oil-marketing companies if the new government which comes to power is NDA.
Do you think increasing inflows of FIIs money in India particularly on the hope of elections could actually cause a threat to Indian markets?
Expectation building up strongly before elections could be a cause of concern and FII’s investing in hoards before the election on hopes of a tactical rally culminating once NDA government establishing a clear mandate in May, is a highly speculative trade.
Hence, hot money which chase momentum and is build on certain premise may get reversed equally fast once the outcome doesn’t meet expectation. A coalition with a third front coming into power is the worst outcome and market would be punished severely and the best case which market would give a thumbs up is a NDA coming to power with a clean and clear mandate.
Some of the beaten down sectors like capital goods, infrastructure and power are again on the move. What is your reading of India's capex cycle? Do you think there is scope for further improvement in the capex cycle?
Capital goods, infrastructure and power would add the desired beta to the portfolio once we see India’s capex cycle reviving. Many of the asset heavy businesses are trading at bankruptcy valuation and right policy action from the government and execution would re-rate these stocks significantly.
We feel that we are at the throes of a capex recovery for next couple of years and a clear political mandate at centre will be the key catalyst to trigger a capex recovery at a desired pace. We feel , capital goods is one sector where multibagger stories could be seen in next couple of years as some of the companies in these sectors have good competencies and a great track record and the business model in general for the capital goods segment are asset light and have great earning potential.
Do you think the markets have more room for the upside given the current valuations and fundamentals?
Market has decisively breached the all time high after almost 6 years on back of improving macro economic outlook and on expectations of a NDA government led by Narendra Modi coming to power.
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From a valuation stand point, for last 6 years we have been trading intermittently closer to the historical averages on Sensex & Nifty and just because of the earnings trajectory of Sensex companies compounded at 8% approximately (way below the nominal GDP growth which averaged at 15% for longterm) for this period.
So P/E, P/B and all other valuation multiples got de-rated on sub-par earning growth. Market at present is in the process of re-rating the valuation multiples on premise that the macro stability has been regained, NDA to come in power and earnings would start registering a growth above the nominal GDP average of 15%.
Generally a bull market starts at the throes of extreme pessimism (which we have seen in the last couple of years) and then gradually earning expectation starts improving amid skepticism and thereafter finally earning starts improving and drives the prices higher and finally PE re-rating happens.
At present it seems that the bull case scenario which is emerging for next couple of years is at a stage of expectation of earnings improving going forward. So if the premise on which the expectation is improving finally culminates into real earnings growth then naturally valuation doesn’t look expensive at all and there is more tailwinds in this rally.
How would you advise investors to act before the elections results? Is it right to load equity?
Invest in companies where corporate governance is good, i.e, first management pedigree needs to be checked and then valuation call needs to be taken. If these two things are set right, we need not have to worry about the wild gyration in stock prices and also for our capital safety. Though in the short-term election result to dictate the market and to take a call before a event which is fraught with risk is highly speculative and best way to play out is through options.
You have recent advised your clinets to buy companies like PI Industries and Va Tech Wabag? Can you tell us about these companies and your basic investment arguments?
Both PI Industries & Va Tech Wabag are leaders in their respective field and they has carved a niche in the product or services they render. Both the companies are consistently delivering growth and generating good cashflows and have good return ratios.
For Va Tech Wabag, management pedigree is good and they have experience of almost three decade in the water infrastructure business. This is a asset light business and generates good return on their invested capital and order inflow remaining robust and gives sound revenue visibility for Va Tech Wabag.
PSU stocks have started to move do you think there is hope or its just a sentiment rally? Do you like any stock in this space and why?
PSU stocks are moving because of their sheer undervaluation in most of the cases. Expectation of disinvestment once NDA comes to power is acting as a catalyst for them to come out of their undervalued quotes. We like majority of the PSU banks because we feel the stress in the banking system as far as the bad assets are concerned is done with and NPA cycle is in the process of bottoming out (which seems to be the major valid reason for their underperformance and undervaluation in these stocks) and majority of stocks are trading at less than one times p/b and with dividend yield of closer to 5%.
Apart from the banking stocks, we like Engineers India, BEL, Concor, NMDC, MOIL, Balmer Lawrie, SAIL and other cyclical stories in this space where the stocks are trading at a discount to their fair value because of downswing in the economic cycle. Expectation also remains high on oil-marketing companies if the new government which comes to power is NDA.
Do you think increasing inflows of FIIs money in India particularly on the hope of elections could actually cause a threat to Indian markets?
Expectation building up strongly before elections could be a cause of concern and FII’s investing in hoards before the election on hopes of a tactical rally culminating once NDA government establishing a clear mandate in May, is a highly speculative trade.
Hence, hot money which chase momentum and is build on certain premise may get reversed equally fast once the outcome doesn’t meet expectation. A coalition with a third front coming into power is the worst outcome and market would be punished severely and the best case which market would give a thumbs up is a NDA coming to power with a clean and clear mandate.
Some of the beaten down sectors like capital goods, infrastructure and power are again on the move. What is your reading of India's capex cycle? Do you think there is scope for further improvement in the capex cycle?
Capital goods, infrastructure and power would add the desired beta to the portfolio once we see India’s capex cycle reviving. Many of the asset heavy businesses are trading at bankruptcy valuation and right policy action from the government and execution would re-rate these stocks significantly.
We feel that we are at the throes of a capex recovery for next couple of years and a clear political mandate at centre will be the key catalyst to trigger a capex recovery at a desired pace. We feel , capital goods is one sector where multibagger stories could be seen in next couple of years as some of the companies in these sectors have good competencies and a great track record and the business model in general for the capital goods segment are asset light and have great earning potential.