Nifty target at 12,000 for CY19 but will raise it if multiples get re-rated: Ravi Sundar Muthukrishnan, Elara Securities
As fundamentals improve, more money can come in and the market can trend upwards, says Muthukrishnan.
What is your market outlook from now up until May 23 when the results come out?
My sense is the markets will continue to remain volatile with an upward bias till the elections are over and as you rightly pointed out if BJP were to come to power, it will get a new impetus because all the building blocks are there in place and markets will take off from there and the economy also should take off from there.
Ideally, the historical analysis of past elections tell us that it does not really matter which party comes to power but in this case, because the building blocks are already there, the economy will be on a sound footing once the BJP comes to power.
Post that, it is the earnings and the multiples which will take care of valuations. If BJP comes back to power, you can expect a re-rating in the multiple especially because the political risk for the economy would drop. The cost of equity for India would tend to fall and as a result, the multiples can expand. We have a target of 12,000 for CY19 but it could even go up if the multiples re-rate.
Unlike last time when Nifty was at 11,400 levels, this time the broader market as well has begun to participate. Is this a sustainable move or is it just a dead-cat bounce in an extremely oversold pool?
One good thing which happened in March is that the FII flows have been pretty robust. In the last 10 days, we have had almost about Rs 13,000 plus crore flowing into the economy. This was primarily because of the pause in Fed rates in the US and the liberal stance take by other central banks which has made more money flow into India. This flow will continue because as the fundamentals begin to improve, more and more money can come in and this market can trend upwards. That is sustainable for quite some time!
Why is capital goods sector looking good to you? Any select names on your radar?
The first thing that made us excited about capital goods is the fact that there has been a good sizable allocation for the railways which means the transportation capital goods companies should do well. T&D will continue to do well.
We think that companies which are into airport modernisation will do well and a lot of companies will have to fulfil environmental norms moving forward. Capital goods companies meeting those environmental requirements should do well. More than that, even the infrastructure space has got good impetus in terms of the budget allocation.
Companies in that space also should do well. Also companies which are doing pretty good in the metro space, in the T&D space, can be looked at. For example, KEI is a good company. We like PNC Infra in the infrastructure space. BEML should also be a good bet moving forward.
Are you betting on two-wheelers or four-wheelers? What kind of auto ancillary companies do you believe could see a strong future growth?
There is still a bit of pain left for OEMs. There is a lot of unsold inventory. You have to look at these companies with a slightly long-term perspective may be one or two years. Maruti still is a good bet because it still has been able to retain its market share despite all the competition coming in. They have new models to offer. There has been some cost savings which has been happening in the last couple of months. The inventory issue which has been haunting Maruti for some time now will soon be a thing of the past in the next couple of months, may be three to six months.
Likewise in the two-wheeler space, we continue to like Hero MotoCorp because of the rural impetus they have. Their scooter business is something they have to watch out for but their motorcycle business is doing very well in the rural space.
When you come to the auto ancillaries, it may be worth the while to play auto ancillaries which are in the replacement space for example Exide Industries, MRF.
If I were to call out the list of the biggest contributors and movers within Nifty bank, it is Bajaj Finance, ICICI Bank, HDFC Bank and Axis. Would you look beyond these four names in financials?
In the largecap space, we continue to like HDFC Bank because of the retail focus and the same reasoning applies to even ICICI Bank. We do not cover Bajaj Finance. So, I would not be able to comment more on that. In case of both these banks including Axis, we like them because there is a strong rural retail growth which we are expecting particularly in the housing space where most of the business has now been taken over from the NBFCs. But in the smaller bank space, we like City Union Bank and we also like big ones like HDFC Bank and ICICI Bank . as their CASA is pretty strong and in some cases, NCLT resolutions in margin expansions could also happen.
The asset quality is also improving and so net-net, it has been a win-win in all these four fronts for all these banks. We expect them to do well even after the elections because once the capex cycle tends to revive, we would expect the capital lenders especially the ICICI Bank to get a fresh impetus because of capex plans.