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Edelweiss’ Sahil Kapoor on where to invest in broader markets

Keep on investing in bottoms-up stock-specific ideas, says the chief market strategist.

ET Now|
Apr 02, 2019, 05.33 PM IST
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Focus should be on broader markets specifically on the mid and smallcap space, said Sahil Kapoor, Chief Marke t Strategist, VP, Edelweiss Investment Research, Edelweiss Securities, in an interview with ETNOW. Kapoor finds opportunity in auto, construction and non-largecap BFSI sectors.


Edited excerpts:


Is it time to deploy fresh money or should one be a little prudent and only profit-take in bits?

Our focus right now is not on the frontline indices - be it the Nifty or Sensex. The opportunity lies in the broader market. We feel that there is enough room in the broader markets and enough opportunities to capitalise. You should keep on investing in bottoms-up stock-specific ideas.

Largely, our optimism stems from an expectation that economic growth is already trough-ing and we believe that we have a strong pickup in growth ahead of us and also earnings growth will come back. Largely, focus should be on broader markets specifically on the mid and smallcap space and largecaps are relatively more expensive. You could have lesser opportunities there but broader markets is the place to be in.

But where in the broader markets?

I will just give you an idea of how we are looking from a pure top-down approach. We have a strong nominal growth coming up which has a few drivers. We feel that inflation has hit a cyclical low level and it is going to rebound to a normal mean which will help us in higher nominal growth.

Currently our nominal growth is languishing closer to 10%. Historically, it has been between 12% and 15% and I think that is where it will come back and settle down. We feel that there is a good dose of monetary stimulus going ahead including a rate cut which could happen in the next few days.

There will be further rate cuts during the year, plus the transmission will also happen as liquidity stress eases out.

Third, credit growth is likely to pick up with credit availability picking up with PSU banks coming out of PCA and as I said, liquidity stress also coming down. If you combine this with a revival in growth, you will get a lot of opportunities. We have looked at a large basket of about 300 stocks and we found that more than 53% of this basket now falls into something that we call cheap or below average valuations that means historically when you have invested when this reading hits about 50% plus your CAGR returns goes up to about 20-22% over the next two, three years.

One of the sectors which fall into significant cheap or below average valuations is clearly auto and auto ancillaries. The amount of gloom and doom that we are seeing in auto becomes a good contra cyclical bet. In the next one or two years, it could deliver excellent returns.

The other is the construction space. You highlighted building materials and if you add construction and consumption together, that is another space which could do well going ahead.

The third space is non-largecap BFSI sector including some of the PSU banks. These are the sectors which could throw up very interesting opportunity in the next two years.

I want to stress on infrastructure and capital goods. What is the sense that you are getting in these companies? Of late, it had underperformed the broader end of the market?

One thing is quite clear. We have had an investment winter for about 10 years now, investments as a percentage of GDP has not really increased its share per se. There are generally two drivers of high capex; one is probably break-neck consumption demand which leads to increase in capacity utilisation later and second is concurrent support through lower interest rates.

About two years ago, we had a mix of both of these happening together but I think then we had a hiccup with some of the policy decisions that we had. I think in the next one or two years we could have either of the two kick-starting sort of a mini recovery, some of it is visible in a few sectors like cement. So, cyclically, these sectors are cheap in comparison to what they were historically. If you were to do a clear bottoms-up approach and look at companies which could deliver good ROC plus their balance sheets are clean, they will make for a good investment case, specifically, investment recovery could be faster once elections are out of the place and you have a stronger dose of monetary stimulus.

These two factors could make an interesting case for this sector. We remain constructive, particularly looking at ideas from a bottoms-up perspective in this sector.

How critical do you think is the monetary policy meet? The policy announcement is on Thursday. What are you expecting from the commentary?

We expect a change in stance to dovish which the markets also expect. Secondly, we are waiting for RBI to come out with a credible framework on how it will deal with transmission issues and the intense liquidity deficit.

With swap now becoming a fixed feature as a liquidity tool, whether RBI announces another set of OMOs and what will be the overall tranche, these are the questions which are very important. One thing is quite clear that RBI is giving indications that it is quite dovish and it is focussing more on growth.

A more clear step towards liquidity management or a framework could well be a very important take-away from the RBI policy. Markets are already cooking in a rate cut of about 25 bps. RBI could probably deliver that.

I noticed that you are still fairly bullish on the auto and auto ancillary pack. It is interesting because we have been getting an avoid on the basket as a whole, particularly on the auto front. Is there a particular section you are looking at or specific names that you are bullish on?

Roughly, both Q4 FY19 and Q1 FY20 quarters are going to be tough. We foresaw that probably even Q1 FY20 will have slower sales because we are undergoing quite a stressful liquidity scenario which is hitting a number of auto companies.

The auto sector underperformed the largecap indices for a very long time. Historically, we have not really been such stark underperformers. So focus right now are largely on companies which are pure bottoms-up and probably gaining market share. For example, one of the companies that we have in our coverage is Lumax Industries which has gained a lot through LED and probably will make more market share gains going ahead.

Right now, the strategy is more bottoms-up but there are other stories like Rico which also could do well. Even for that matter, in two-wheeler space, once the outlook becomes clearer, Hero could also make a comeback. These are the few names that we are looking at right now. We have a bunch of other companies that we are analysing and probably will advice on them.

What is leading to the upmove in Tata Motors? For the second consecutive day, along with its DVR, you are seeing a huge built up in both these names.

Largely, the return of growth or possibly expectations of growth in China and parts of Europe will help Tata Motors to a certain extent. In the European market specifically, the data has deteriorated significantly in the last six to nine months. Many countries are either in recession or looking at two quarters of no growth and China itself had had a tough last six months.

If you look closely, many countries have already promised stimulus. For example, ECB has announced TLT from September onwards. China has begun to cut taxes for corporates and is trying to stimulate the economy once again. These factors will probably give some comfort to Tata Motors going ahead vis-a-vis JLR. That comfort will start reflecting in the stock price.

What do you think is the significance of the Supreme Court scrapping RBI’s February 12 circular on power sector NPAs for sectors that have been impacted by this as well as for the Reserve Bank?

The first thing is a lot of recognition for NPAs has already happened. This is a measure which on hindsight will largely not lead to any changes in how NPAs have been recognised historically or up until today. But going forward, it gives banks more room to manoeuvre around how they recognise and report stress on their books.

To that extent, we are back to days where banks could take their own call, which will probably get reflected in how NPAs are reported from here onwards. We are expecting that the recognition cycle has already peaked. It more or less ensures that you will not see NPAs moving higher going ahead or not getting reported as aggressively as they were earlier.

That will reduce some amount of stress from how banks will manage their balance sheets and how they will report it. From RBI’s perspective, the legal standing of the order is on whether it is legally enforceable through RBI or not. It does not question the authority of the RBI and to that extent, RBI always has the capacity to come out with new regulations and frame its policy in a different way.

We will have to wait and watch but for the industry as a whole, RBI probably will have more measures in the near future.

Also Read

We could be 1-2% from reaching a bottom in Nifty: Sahil Kapoor, Edelweiss

Edelweiss Securities’ Sahil Kapoor is betting on this theme going forward

Market not very strong on momentum but the trend is still upwards: Sahil Kapoor

Bullish on 3 themes for next 12-18 months: Sahil Kapoor, Edelweiss Securities

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