Once the quarterly earnings and state elections are over, if the market bottoms can be confirmed, Chhitij Jain, Head- Equities at Rudra Shares & Stock Brokers said in an interview to Moneycontrol's Sunil Shankar Matkar.
As the growth prospects of the economy are intact and very bright, any positive indication from these two fundamental triggers could take the market to new high but for now, there is pain, he feels. Edited excerpts:
Q. The market has corrected nearly 12 percent since August 28. Do you feel it has bottomed out and on course to make a new high?
A. Assuming the bottoming out at this stage would be little amateurish. We think Nifty will touch 9,951-9,685 levels if we consider the retracement theory. A bearish engulfing pattern on the monthly chart with negative divergence suggests that pullbacks are likely. Hence, we can see the volatility in the next two months with a negative bias.
Bottoming out can be confirmed once done with quarterly earnings and state elections. As the growth prospects of the economy are intact and very bright, any positive indication from these two fundamental triggers could take the market to new high but for now, there is pain.
Q. Are there any other factors (apart from rupee, crude, US bond yield, rising interest rate fear, liquidity fear) on the horizon that could extend market fall?
A. Apart from those, lower-than-expected Q2 numbers may extend further fall, especially in banking and FMCG sector. The market is already expecting Sensex EPS of Rs 1,850-1,870 for FY19. Hence, any downgrade in this number will have an impact.
Also, a further increase in current account deficit (CAD) to 3 percent could be a big factor. Apart from this, uncertainty in the upcoming state elections, as we expect that market would take it as a semi-final of the general elections next year, will also have an impact. Any reverse results in Madhya Pradesh and Chhattisgarh can further be part of the play and drag the market substantially.
Q. After current correction, many analysts still feel valuations are high currently. What is your view – is it the time to accumulate or wait for more correction?
A. We feel valuations are not so rich, though not undervalued as well, somewhere fair. Hence, it is a right time to accumulate, especially mid-cap and small-cap stocks as they have corrected more than 50 percent since February.
Large caps are trading at high valuations - especially IT and FMCG. There is still room for some more correction, we suggest to wait.
Q. Elections date for five states have been announced. Are you expecting populist announcements ahead?
A. No, we are not expecting any more populist measures, already a code of conduct has been imposed in these states.
However, in the interim budget, the government cannot change the tax slabs but they can increase the subsidy burden in terms of health, education and [introduce schemes] specifically for farmers and agriculture. It may extend the fiscal target for the next year.
Meanwhile, the biggest upcoming challenge for the government is to handle the stressed power sector having around Rs 2.5 lakh crore worth of stressed power plants.
Q. Would you recommend investors continue with their IT picks or should one book profit at current levels?
A. Right now, the IT sector is performing due to rupee depreciation and growth in the US economy. Also, we expect the rupee to sustain at 72- 73 a dollar after making a low of 74-75.
The valuations in this sector seem to be high and expected top line is also not very overwhelming. Except TCS and Mindtree, we would suggest book profit in IT companies.
Q. Any five stocks that you like with a 3-year perspective?
A. Equitas Holdings| Target: Rs 230 | Return: 79 percentUjjivan Financial Services| Target: Rs 495 | Return: 99 percent
Both stocks are on different themes. They are neither universal banks nor NBFC. They are small finance banks with different guidelines issued by RBI:
a) To extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL)
b) At least 50 percent of its loan portfolio should constitute loans and advances of up to Rs 25 lakh.
Both stocks are expected to "nail it" owing to strong demand from rural penetration. Equitas has already made its secure loan book to 70 percent and has transformed its maximum branches into banks.
Ujjivan will do the transformation in this financial year. Currently, it is available at P/BV of 1.75x and 1.87x respectively, we expect these two stocks to outperform in the coming years with a target of Rs 230 and Rs 495 initially.
Godrej Agrovet| Target: Rs 810 | Return: 56 percent
The company has launched new products in crop protection segment with capital expenditure of Rs 275 crore in the current fiscal to boost its chicken meat processing, oil palm and agro-chemicals businesses.
Additionally, the company is setting up a palm oil processing facility to increase its production capacity with 60 tonnes per hour. Moreover, an increase in import duty on palm oil, making imports expensive and domestic production competitive, will benefit the company substantially.
Dairy margins are expected to stabilise owing to expansion towards the value-added products, though volatility in milk prices can play a spoilsport. The target for the next 2-3 years is estimated at Rs 810.
Shoppers Stop| Target: Rs 728 | Return: 55 percent
Deal with Amazon has boosted the topline of the company making it debt free leading to a strong balance sheet. Further, well build liquidity makes the stock a strong Buy candidate.
Shoppers operating margin is expected to improve in near-term by 7-8 percent with expected recovery in store sales growth to about 5-7 percent. Additionally, Rs 150-200 crore of cash generation is expected annually in the books.
Moreover, with the advent of the festive season, the launch of "Wardrobe refresh" by the company offering over 150+ brands under one roof would add numbers to the topline. We suggest, accumulate with the target of Rs 728.
Zee Learn| Target: Rs 60 | Return: 61 percent
With MT Educare in its bucket, Zee has reported strong Q1 numbers. Limited competition in the organised segment and a disciplined execution makes it pure play in this segment.
Cash generating business model and enjoying excellent EBITDA margins of around 38 percent for FY18, Zee could become one of the biggest organised players in the education industry. We suggest, accumulate for an initial target of Rs 60.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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