 "Single digit growth seen in third quarter: AK Prabhakar")
AK Prabhakar, Head of Research, IDBI Capital in conversation with Indrani Mazumdar talks about the road ahead for the markets in view of third quarter earnings. He also shares sectoral outlook and top bets from a near to medium term perspective. Edited excerpts:
What is your outlook for markets for 2016? What key support levels do you see for the benchmarks Sensex and Nifty from a mid term perspective?
The outlook for 2016 can be summed up into two parts. In the first half, if the Nifty breaks 7,490 levels on the down side then 6,800 or 6,600 levels looks possible before any recovery. Nifty & Sensex have both breached previous year's low levels which doesn’t give any comfort. In the second half, one could see recovery in the overall market.
Broader markets have significantly outperformed larger caps in calendar year 2015. How much more upside do you see in this space? Are valuations stretched at current levels?
Mid-caps & Small-caps have outperformed the benchmarks. Profit booking is seen in the broader markets at higher levels as valuations are stretched. However, there are good India specific stocks where the long term story is intact. Meanwhile, in case of midcaps and smallcaps, 12-15% upside potential still exists on buying support from local funds.
What is your take on the oil & gas space which has witnessed some action on the back of a dramatic fall in the crude oil prices. Would you suggest it is a good time to buy OMCs?
Crude oil price has witnessed a topsy-turvy movement in past one year on the back of increased supply from OPEC and USA amid slowing global economy. We believe that lower demand from Asia Pacific region, primarily China and supply glut from OPEC region would continue to put pressure on crude oil prices. Also, the recent cold war between Iran and Saudi Arabia diminishes the chances of any agreement to cut the production by OPEC countries in order to boost prices.
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We are looking at the crude oil price to remain at lower levels of US$30-50 per barrel from a near to medium term perspective. At the same time, refining margins are expected to remain elevated due to strong gasoline crack spread which is hovering over US$20 per barrel. In this scenario, we believe refineries and oil marketing companies should outperform the sectoral index in a near to medium term horizon, while upstream companies are likely to remain under pressure. Therefore, we suggest to keep accumulating OMCs at lower levels. We have a “Buy” rating on BPCL and HPCL while an “Accumulate” rating on IOC.
What is your outlook on Q3 (Oct-Dec) earnings? Which sectors do you feel are likely to positively/negatively surprise us?
The growth in Q3 can be as low as single digit, with many companies likely to downgrade guidance for full year. Positive surprises can be expected from RIL, Petronet, BPCL, HPCL, IOC, IndusInd Bank and Karur Vysya Bank. However, negative surprise can be expected from many of the names from the metal space, Banks and NBFC. Also, order books of capital goods could negatively surprise us.
Between banks (private and public) and NBFCs, what are the attractive segments of investment from a medium term perspective?
IndusInd Bank & Karur Vysya Bank are our picks in banking space from a medium term perspective. However, we advise investors to avoid PSU Banks as the RBI tightening policy can impact PSU banks in a major way.
What is your assessment of global markets especially China? Do you see a probability of any shocks that can derail the Indian market further?
China is just one factor, there are many global events which are impacting India. Fall in crude prices has triggered selling by sovereign funds. Further, India which receives high remittances from NRIs working in gulf countries is likely to impact consumer spending and the realty sector has been impacted the most. Global volatility is keeping the rupee on the edge and any further weakness in the currency can reverse the flow.
Should one selectively start picking defensives to shield the portfolio from any post Q3 earnings shocks? If yes which names would they be?
Among defensive stocks, power sector stocks like Powergrid, NTPC, Torrent Power are preferred. Meanwhile, in the oil & gas segment which benefit from lower crude oil price, RIL, Petronet, IGL, GAIL, HPCL, BPCL are our top bets. In addition, from the midcap space, Nilkamal, Astral, Poly Technik, Supreme Industries, Arvind, BEML and BEL are the stocks we like for 2016.
With Infosys result expected later this week, what is your call on the IT space? Is the best behind for IT frontliners?
We do not believe that the best is behind for the IT frontliners. Q3 is seasonally a weak quarter for the industry. In Q3FY16 there has been negative impact of cross-currency volatility and decline in utilization due to flood in Chennai. However, we remain positive on medium-long term growth. We prefer large-caps and our top picks are Infosys and HCL Tech which at PER of FY17E of 15.8x and 13.2x provide favorable risk-reward.
The auto sector has displayed an interesting show with Maruti Suzuki, Ashok Leyland , TVS Motors, all making multi-year highs all through 2015 while Tata Motors witnessing quite a bit of fall. How would you approach the entire pack and what would be your top two picks?
Tata Motors was once heavily dependent on China as about one third of JLR’s global sales were coming from there. But now, UK, Europe and North America have grown at a faster pace in last 12 months and have compensated for the weakness in China sales. Going forward, we expect the trend to continue and dependence on China will reduce further given many new and exciting model launches in pipeline in the growing economies. We are positive on the stock.