Benefits of GST and its offshoot financialisation and formalisation have not even begun to play out and will emerge over next seven years. Those midcap names that are in these spaces will thrive, Vikas Khemani, President & CEO, Edelweiss Securities, tells ET Now.
Edited excerpts:
What is your view on the market?
The market is in a very interesting phase. The breadth may be missing but the market looks to be touching new high. Only about 10 or 12 odd stocks are contributing to the entire rise.
Is there something wrong with that because everybody is saying this should not happen, this is bad news.
No, there is nothing is wrong with that. It just does not show conviction in the overall width and breadth of the market. But this is only a temporary phase of the market primarily because of a) a lot of macro uncertainty overhang right now. In this environment, the last thing an investor wants to be stuck with is an illiquid scenario. We have largecaps which are liquid, delivering good earnings and have a robust future.
Investors are looking into defensive kind of ideas which is explained by the rally in the top 10-12 stocks at this point in time and that has contributed to a 800-900 point rise of the Nifty over last year. When the big macro uncertainties around the global rates, elections and oil prices recede, you will start seeing confidence coming back into the market.
But do you fear that at any point these 15 stocks in the Nifty may fall prey to the broader market trend? Could the Nifty stall after making a peak as we are very close to an all-time top? Would it be the broader markets that will catch up with the 15 names? Would the divergence between the slump in the broader market and steadfast rise of the 15 Nifty stocks continue?
It depends on the liquidity and how the macro factors turn out. If the overall liquidity profile towards markets change, you will see all these stocks also giving up some of these gains and that will not have necessarily to do with fundamentals.
Fundamentals of many of these stocks have remained the same for quite some time and TCS has been up 40% in last few months. They have been guiding earnings growth reasonably well for last three-four quarters. Given the defensiveness of the market, given the fact that most mutual funds have 8- 9% cash in hand, investors are hiding in some of the 15 names. Even if you have confidence in earnings of some of the midcap or smaller caps, the macro environment is not giving you confidence to invest into those stocks.
Is there a higher chance that broader markets will catch up with the index?
Absolutely. The only caveat I would put is that if something untoward were to happen at a global level, then the situation might change. This uncertainty probably will continue over next six to nine months.
What will drive that uncertainty? Are global cues the biggest risk in the market right now?
There are three big risks. A) Oil price is a very big risk for India and especially as we go towards November 4, when the Iran embargo kicks off. If oil were to go towards $80, $90 or $100, India will be in a very tight spot and we might see some implications both on inflation and interest rates.
B) We have big elections coming up and that uncertainty looms large over our entire policy front.
C) How the currency pans out due to trade wars.
All in all, we are seeing a pretty uncertain environment. We could get clarity on some of them over next three to six months. Some of them might continue for longer but we will get clarity on elections and oil price front.
What could support the markets at these levels? It boils down to earnings and within earnings, IT has rolled out the red carpet. TCS came out with a great set of numbers. Do you think other IT majors can follow through? That overweight position builds only on IT from the start of the year till now, post these earnings call?
We think earnings recovery is on way and we are seeing a broad-based recovery happening. If you were to take corporate facing banks or PSU banks out of the Nifty, you will see almost 25% plus earnings growth in this quarter and a kind of profile that you have been seeking for a long time.
Earnings growth is definitely happening, demand recovery is there. Across the board, consumer and automobile numbers are picking up very well. We think that IT, automobiles, consumer stocks, banks especially the private sector banks, NBFCs will continue the earnings momentum.
In our opinion, IT is on a recovery path for next couple of years at least. The recovery has just begun, the order book is very strong, most of the companies are guiding that the demand scenario is very strong and currency weakening only helps them. In that sense, IT trajectory is here to stay for a couple of years.
Are the stock markets already factoring in that or is there still scope to jump on to the IT bus even now and make money?
As long as you are clear about earnings growth which is going to continue, markets are not likely to leave it. We have seen how stocks have continued to remain expensive as long as the earnings growth was there. There would still be fund managers who would not be invested into IT or would be underweight IT and would want to increase weight of IT. They would come and buy. We have seen this trend for the last one year. We have been bullish on IT and we have seen this outperformance happening gradually. As long as earnings continue. I there will not be any let down in IT.
I am checking at the top traded counters right now purely in terms of value. It is TCS, Reliance, Infosys, HCL Tech. It is not Fortis, it is not any of the midcap stocks. If you have to make a lock and key portfolio where you can see earnings visibility, what would you like to buy today assuming that we will talk about it in 2025 and these can give you a 20-25% return?
In my opinion, definitely some of the private sector banks would be there because we have seen just the beginning of a very big financialisation programme and shift of markets share from public sector to private sector.
Among private banks, there are corporate banks and retail banks. now there are also new age banks like AU Small Finance Bank, Ujjivan Bank, Bandhan Bank. Would you stick to an HDFC or a Kotak Mahindra or would consider the new age banks as well?
All these banks will do very well because everybody is playing in a niche segment. HDFC Bank or a Kotak Bank are largecaps and would give 18-20% return over next 10 years. Even 10 years ago, people used to says HDFC Bank is expensive and every year it has delivered. As long as the organisation is geared to capture the growth opportunity, it is better to stay in a name which is a little expensive but has a good management, a good business model and which had delivered continuously year after year.
These are some of the very fine organisations. Some of them are very expensive. Eicher is expensive but it keeps on delivering returns. I do believe that these will be very large companies 10 years down the line and they would definitely compound.
Where does it leave the alpha opportunity in the market because with compounding names, you will get consistent returns. Where are you looking for that value play where you can pick the stock at the right point and ride the wave as and when it comes through?
I believe that in midcap, there are lots of value plays as some of the stocks have corrected 50-60%. Those business models are not broken, they are still there. Just because of liquidity profile changing and some of the headwinds, they are not doing well. They will grow but you have to get the cycle right. You have to be patient and take risks in those names to get the value at right point in time. You have to track them. Typically, you will find that in cyclicals when this kind of selloffs happen. But they might test your patience before they start delivering and that is the key characteristic of a value pick.
I believe that today also, in midcaps there are lots of names and lots of stocks which are offering fairly good amount of value.
Anything new that is coming out on your radar, not from a buy/sell perspective, but just as a story that you are fascinated by?
We like Some of the chemical companies. Look at Fine Organics public. It is a great company. It has historically delivered and continues to deliver. It is an Indian MNC. Their margin profile is like consumer company. Its ROE profile is like that of a consumer company and it keeps on delivering year after year. But it still remains a very tiny company. Can that become fairly big over next 5-10 years? The answer is yes.
There are opportunities emerging in new segments. In chemical space, there is a huge opportunity going forward. Another name is Galaxy Surfactants. We were bankers to both the companies but these are pockets emerging and they will create compounders. These are very fine companies with good balance sheets, very little debt and you will get them in this kind of market only at a right valuation.
In a bearish market you will get them at 30 PE, 25 PE and you will probably carry those kind of risks but this is the time to build a portfolio as you will get these names at a reasonable price.
About a year-and-a-half back, you said that the big picture in the market is – A) the financialisation theme which you still continue to like and the B) in anticipation of GST was the shift from unorganised to organised. Is that still a theme that you are betting big on or do you think the story is done with over there?
It has not even begun. The e-way bill has just started and that has slowly changed the game in favour of organised players. Again with this correction, some of the names in the midcap space which are a part of this theme will benefit. This is not a one-two-year theme. It is going to play out over next four-five-seven years and not only because of the regulatory aspect. That is only one part, premiumisation is another aspect, technology development is another aspect, brand related issues are another.
So shoes, textiles all of it?
Absolutely. You will find many more. Yesterday, a plastic industry promoter was in our office and he was saying that earlier they had 28% tax and 14% was sales tax. Earlier an unorganised player could evade that sales tax and be more competitive. Now, the only tax is 18% and they are getting input credit. That has made unorganised player completely unviable.
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