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There aren't any immediate triggers to reverse mkt trend: Prakash Kacholia

We see the merger of public sector banks as a step in the right direction, says Prakash Kacholia

Prakash Kacholia, Managing director, Emkay Global Financial Services
Prakash Kacholia, Managing director, Emkay Global Financial Services
Puneet Wadhwa
4 min read Last Updated : Sep 15 2019 | 9:32 PM IST
After a sharp slide since the Budget in July, the markets are in consolidation mode. Prakash Kacholia, managing director at Emkay Global Financial Services, tells Puneet Wadhwa that India’s underperformance versus the emerging markets (EMs) in the last three months could be peaking. Edited excerpts:

Is the sell-off since July overdone?

While there has been a sell-off in the emerging markets (EMs) in the last couple of months, India has underperformed peers by 4–5 per cent. The fall in the market after the Budget is probably explained by the lack of any big-bang announcement. Fresh slippage risks for banks from corporate accounts, a continued liquidity crunch, the slowdown in consumer discretionary such as auto have added to the disappointment. Unfortunately, there isn’t any immediate trigger to reverse the market trend. The government’s ability to kick-start growth is limited by tight fiscal conditions. 

Where are the opportunities now? 

Our positioning on the market would be defensive, with the Emkay Alpha Portfolio (Nifty) having high cash overweight position. We remain overweight on IT services, engineering and insurance. Our biggest underweight sectors are autos, non-banking financial companies and fast-moving consumer goods. HCL Tech, ICICI Bank, L&T, Marico and NTPC are among top picks. 

How comfortable are you with market valuation? 

We believe consensus expectations from the Nifty are still elevated, factoring in around 27 per cent year-over-year (YoY) earnings growth versus around 10 per cent delivered in the first quarter of the current financial year (Q1FY20). This makes the 15x price to earnings (P/E) multiple appear slightly higher. Given our view that a recovery in the broader market is not imminent, it is probably better to stay selective in small- and mid-caps and stick to companies with good corporate governance and growth outlook. 

Do you see foreign portfolio flows coming back to India in a big way? 

The US presidential elections are about 14 months away. The protectionist rhetoric globally could remain high, impacting risk sentiment. That is clearly visible in the outflows from EMs and into safer havens. However, India’s underperformance versus EMs on both flows and market performance in the last three months could be peaking. Hence, relatively, the Indian markets could see slower outflows when compared to the exodus of the last three months. That said, the steady monthly flows into equity mutual funds by retail investors suggests a decent level of maturity. This should continue.
  
How should investors look at financial sector stocks?

We see the merger of public sector banks (PSBs) as a step in the right direction. This, coupled with the recapitalisation support, sets up a good platform for these banks. All said and done, mergers as complex as these take time to fully integrate. There can be at least a few years of integration distractions for these merged banks before they start competing effectively. In the interim, we prefer playing the financial sector through top quality private banks and insurance companies.

Do you think the government will meet the divestment target in FY20? 

Despite the surplus transfers from the RBI, the government’s fiscal math still remains challenging. Weak markets will make it tough to meet disinvestment targets, as the appetite for exchange-traded fund (ETF)–based divestments could be less. The government could dip into the cash-rich balance sheets of some PSUs, through either buyback announcements or cross-PSU sales (like HPCL earlier). True reforms, like privatisation, could be liked by the markets but politically tough. If pushed to a corner, we expect the government to stick to fiscal discipline by cutting expenditure, rather than report a slippage in the deficit target.  

Your expectations from the second-quarter results season (Q2FY20)? 

The high-frequency data points and early festive data points do not inspire confidence that Q2FY20 will be very different from Q1FY20. We believe H2FY20 to be better than H1FY20 due to substantial increase in government spending, lower base and better rabi crop prospects. We see around 10 per cent downside to consensus earnings estimate for FY20. Given the current valuations, this could temper any sharp recovery in the markets.  

Topics :Emkay Global Financial ServicesEmkay GlobalBanks merger

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