 "Markets to deliver 8-10% returns in 2013: Daljeet S Kohli")
Markets will continue to remain choppy this year, believes Daljeet S Kohli, Head Research, IndiaNivesh Securities. He believes this is a stock-picker's market. In conversation with Sheetal Agarwal, he says that the earnings downgrade cycle is not over yet. Edited Excerpts:
What is your outlook for the markets?
It is a mixed scenario for India as a country. Macro environment will improve because gold and crude are going down. So your Current Account Deficit (CAD) which was looking very bad last quarter will become more manageable. But till now all the CAD was being funded by capital flows. Post the commodity crash, the risk taking capacity has also gone out. This simply means all the capital flows which were coming will go away. So the deficit in CAD, will now become deficit in Capital account. Thus, volatility will remain very high in the markets throughout the year. The headline indices are likely to give about 8-10% returns at the end of the year. But there will be stocks and sectors which will give substantial returns. It is purely a bottoms-up approach as of now.
Expectations from the earnings season?
Which sectors will do well?
Pharma stocks will continue to do well. Smaller companies such as KPIT and Tech Mahindra will do better in the IT sector. We like Metals sector and have a Buy on Sterlite and Hindalco. Tata Steel can now become a Buy given the recent correction in its stock price. Though metals prices are down 5-10%, but they are above 2008 levels. If we assume that global scenario will become better from here, then the commodity prices will not deteriorate further significantly and in that scenario Indian companies can benefit.
Indian companies are always the lowest cost producers. This means pricing will not have too much impact on them. Secondly, in last 3-4 years, these companies have expanded their capacities by 2-3 times. So they are ready to meet any incremental demand. That will drive growth for these companies. We like Oil and Gas sector though we believe results will not be very good due to subsidy burden and flattish production. We are bullish on Cairn India. Cairn will generate cash worth $1 billion every year for the next five years but its market cap is less than $1 billion. So it is a good buy.
While the power companies will show better topline growth in March quarter due to new capacity additions, their bottom-lines will be hit because of the rupee and coal prices. We are buyers in Tata Power because of the inherent strength in the company. We also like NTPC and Powergrid. We are expecting flattish profit growth for Banks. We think there will be no further deterioration in asset quality from here on. We are a buyer in dip in the public sector banks as they will gain from further rate cuts. SBI has maintained its profitability though asset quality is a problem. I think at 1.5 times FY14 estimated adjusted book value, all the negative news is already priced in SBI. We also like BoB and Allahabad Bank amongst PSUs.
Is Infosys becoming more of a trading stock now?
Yes it is becoming more of a trading stock now due to the hedge funds. Till two quarters back, the stock reaction to quarterly results was fairly range bound and not too strong. In the last 8 quarters, except the December 2012 quarter, they have underperformed the street’s expectations. Holding of long only funds such as domestic mutual funds, insurance companies has remained largely unchanged over the past few quarters. The only difference is the holdings by ETFs, Singapore, Hong Kong hedge funds has fluctuated between 2% to 12%. They are trying to play with the sentiments and market is moving with that. I think the company should stop giving guidance. Guidance is required in those cases where enough data and history is not available making it difficult to predict the future.
What is your view on the Auto sector?
We have a negative view on the sector and have just one buy call on M&M. Take the case of Maruti. Almost everybody is a buyer in Maruti. I don’t understand the logic of buying Maruti. The Japanese Yen is depreciating and every one% of depreciation adds 2% to Maruti’s earnings per share (EPS). Maruti has done Rs 40 EPS for nine months of FY13 and as per consensus Bloomberg estimates, its FY13 EPS is pegged at Rs 66. That means street is building in Rs25-26 earnings expectations from the March 2013 quarter alone. Let us assume they achieve Rs 66 earnings in FY13. Now, FY14 EPS is estimated at Rs 100, which means 50% increase in profits in one year. That looks difficult for a large company such as Maruti. This is at a time when people are saying next full year macro will not improve much and there will be more competition. Post March quarter results, the stock will witness downgrades.
How much rate cuts do you expect in the upcoming monetary policy?
We are expecting 25 basis points rate cut in the upcoming monetary policy.
What is your outlook for the markets?
It is a mixed scenario for India as a country. Macro environment will improve because gold and crude are going down. So your Current Account Deficit (CAD) which was looking very bad last quarter will become more manageable. But till now all the CAD was being funded by capital flows. Post the commodity crash, the risk taking capacity has also gone out. This simply means all the capital flows which were coming will go away. So the deficit in CAD, will now become deficit in Capital account. Thus, volatility will remain very high in the markets throughout the year. The headline indices are likely to give about 8-10% returns at the end of the year. But there will be stocks and sectors which will give substantial returns. It is purely a bottoms-up approach as of now.
Expectations from the earnings season?
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March quarter earnings will not be very bright. We are expecting no more than 7-8% growth for FY14, which means not more than Rs 1,300-1,320 earnings for the Sensex. Street still expects earnings of about Rs 1,400. Hence, further downgrades cannot be ruled out.
Which sectors will do well?
Pharma stocks will continue to do well. Smaller companies such as KPIT and Tech Mahindra will do better in the IT sector. We like Metals sector and have a Buy on Sterlite and Hindalco. Tata Steel can now become a Buy given the recent correction in its stock price. Though metals prices are down 5-10%, but they are above 2008 levels. If we assume that global scenario will become better from here, then the commodity prices will not deteriorate further significantly and in that scenario Indian companies can benefit.
Indian companies are always the lowest cost producers. This means pricing will not have too much impact on them. Secondly, in last 3-4 years, these companies have expanded their capacities by 2-3 times. So they are ready to meet any incremental demand. That will drive growth for these companies. We like Oil and Gas sector though we believe results will not be very good due to subsidy burden and flattish production. We are bullish on Cairn India. Cairn will generate cash worth $1 billion every year for the next five years but its market cap is less than $1 billion. So it is a good buy.
While the power companies will show better topline growth in March quarter due to new capacity additions, their bottom-lines will be hit because of the rupee and coal prices. We are buyers in Tata Power because of the inherent strength in the company. We also like NTPC and Powergrid. We are expecting flattish profit growth for Banks. We think there will be no further deterioration in asset quality from here on. We are a buyer in dip in the public sector banks as they will gain from further rate cuts. SBI has maintained its profitability though asset quality is a problem. I think at 1.5 times FY14 estimated adjusted book value, all the negative news is already priced in SBI. We also like BoB and Allahabad Bank amongst PSUs.
Is Infosys becoming more of a trading stock now?
Yes it is becoming more of a trading stock now due to the hedge funds. Till two quarters back, the stock reaction to quarterly results was fairly range bound and not too strong. In the last 8 quarters, except the December 2012 quarter, they have underperformed the street’s expectations. Holding of long only funds such as domestic mutual funds, insurance companies has remained largely unchanged over the past few quarters. The only difference is the holdings by ETFs, Singapore, Hong Kong hedge funds has fluctuated between 2% to 12%. They are trying to play with the sentiments and market is moving with that. I think the company should stop giving guidance. Guidance is required in those cases where enough data and history is not available making it difficult to predict the future.
What is your view on the Auto sector?
We have a negative view on the sector and have just one buy call on M&M. Take the case of Maruti. Almost everybody is a buyer in Maruti. I don’t understand the logic of buying Maruti. The Japanese Yen is depreciating and every one% of depreciation adds 2% to Maruti’s earnings per share (EPS). Maruti has done Rs 40 EPS for nine months of FY13 and as per consensus Bloomberg estimates, its FY13 EPS is pegged at Rs 66. That means street is building in Rs25-26 earnings expectations from the March 2013 quarter alone. Let us assume they achieve Rs 66 earnings in FY13. Now, FY14 EPS is estimated at Rs 100, which means 50% increase in profits in one year. That looks difficult for a large company such as Maruti. This is at a time when people are saying next full year macro will not improve much and there will be more competition. Post March quarter results, the stock will witness downgrades.
How much rate cuts do you expect in the upcoming monetary policy?
We are expecting 25 basis points rate cut in the upcoming monetary policy.