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Numbers and valuations going to drive stock market returns: Anshul Saigal, Kotak Mahindra AMC

“The stocks where there are expectations of earnings are those stocks that have been re-rated meaningfully”

ET Now|
Jul 26, 2018, 05.21 PM IST
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Anshul Saigal1
In segments of market where there is very low expectation, even marginal beats are leading to a re-rating, Anshul Saigal, portfolio manager, Kotak Mahindra AMC.

Edited excerpts:

Post this week’s earnings we would be 90% done on Nifty numbers which would give a hint on the direction that the earning cycle would take. What is your view?

What we have seen is that within the Nifty, as also in the boarder markets, there is a lot of polarisation. The stocks where there are expectations of earnings are those stocks that have been re-rated meaningfully, names like HDFC, HDFC Bank, Reliance, etc. While in other names, there is a slight uncertainty in earnings, those have been de-rated without any bottoms and those names have been hit quite substantially in the last six months.

What is happening is that even good numbers are not enthusing the markets because those expectations are already built in. We saw that with Maruti’s numbers today. We have seen that in the past week or so with bank results and hence beats if they are significant. Only such beats are leading to re-rating in some of these names which have already been re-rated. On the other hand, in segments of the market where there is very low expectation, even marginal beats are leading to a re-rating in these names.

This polarisation is showing up in numbers very clearly and going forward numbers as also valuations are going to drive stock market returns. We would bet that the ones where a de-rating has happened already and expectations are low, is actually going to outperform going forward.

Where do you think the derating has happened? The selling has been slightly much more than warranted purely because of technical factors?

Take a look at corporate banks. These have been derated meaningfully. There has been a significant derating in the broader midcap and the small cap markets also. It is not that this segment or this pocket of the market is devoid of quality. These are quality names which have been derated in the last six months because of very low liquidity in trades in this segment in the last six months.

In the last two years, there had been a rerating which to some extent has been corrected but in certain pockets within the broader markets the correction has been much more than warranted.

That bout of derating is creating value in these pockets. Corporate banks are one such pocket. We do believe that real estate is a pocket which over a period of time is going to significantly outperform the markets, particularly those names where balance sheets are strong.

Then the theme where the informal market gets squeezed and the formal market benefits is going to play out quite significantly going forward. What plays into that theme is probably building materials. That segment again has seen some amount of derating in the last six months and that could get corrected over a period of time.

What is the expectation from ITC? While cigarette volumes may be flat, FMCG revenues could actually make up for the losses there?

I would not want to speak particularly about a company’s numbers but if a competitor of theirs called VST Industries are any indicator, then we may see a positive surprise here although the two companies are quite different in terms of size, product profile, etc.

This is a name in which there has been a material de-rating over the last few years and particularly the valuation gap between their numbers and the numbers of HUL is what you would peg each of these names to. Valuation gap between them has widened materially which tells you that expectations in ITC seem to be quite low and when expectations are low, you would not want to bet on a miss on expectations typically, you would want to bet on probably a beat on expectations.

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