LS polls may not have lasting impact on stock market return: Jitendra Gohil

It has been a one-way street for the markets for the past few sessions that have gained on the back of strong foreign flows, says Jitendra Gohil

It has been a one-way street for the markets for the past few sessions that have gained on the back of strong foreign flows. Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, tells Puneet Wadhwa that foreign portfolio investors (FPIs) view India as a good structural growth story and somewhat defensive bet in a global context. Edited excerpts:

After the recent rally,  will markets  undergo a time and price correction?

The rising hope of the National Democratic Alliance (NDA) coming back to power has led to a sharp turnaround in investor sentiment, especially of foreign portfolio investors (FPIs). The election may not have a lasting impact on stock market return. In the short-run, investors tend to overlook fundamentals and the herd mentality behavioural bias can push the markets into an overvalued territory. I won't be surprised if this happens before the election, as buying interest is very high and rupee appreciation can bring investors’ confidence back in India.

How comfortable are you with the overall market valuation at this stage?

Compared to international peers, the Indian market is already trading higher than the historical premium; the MSCI India Index is trading at a 12-month forward P/E (price-to-equity) valuation of 18 times, a premium of about 40 per cent and 50 per cent over the MSCI ex-Asia Japan and the MSCI Emerging Markets (EM) Index, respectively. For the past 10 years, this premium used to be between 30 per cent and 40 per cent. The premium has come down since the last couple of months and has more scope to fall before India becomes really attractive.

Are the flows into equities likely to gather steam after election results?

FPIs view India as a good structural growth story and a somewhat defensive bet in the global context. If global growth falters, it could have negative repercussions on oil and other commodities. Hence, relative to other emerging markets (EMs), India could be a preferred bet and could relatively outperform in that scenario.

Given the recent rally, how much headroom does the mid-cap segment have?

There is some more headroom for mid-caps to outperform in the near term. If post election retail flows accelerate again, mid-caps could do even better. We continue to like the chemicals space and also some niche mid-cap information technology (IT) companies having good client relations. Mid-cap auto ancillaries could see demand slowdown and we are avoiding that space.

Do you find the auto, the capex-driven and the consumption-related sectors still investment-worthy?

We moved the auto sector to underweight earlier this year. The sector is facing high inventory and demand slowdown, leading to higher discounts and lower margins. This trend could continue for a few months. From April 1, 2020, the environmental norms will change and India will leapfrog into Bharat VI (emission norms); hence there could be some pre-buying in the later part of the financial year, which could open up some tactical buying opportunity.

While we remain overall positive on consumption growth in the long run, valuation makes us cautious. On the other hand, the infra and the capital goods sectors could see decent performance due to robust order books. We are a bit concerned about rising receivables. This, however, is temporary and we expect the margins, order inflows and cash flows to improve.

What are your expectations from the upcoming results season?

Nifty Index earnings are likely to grow in high teens in FY20, which is lower than the consensus expectation of over 24 per cent. In the March 2019 quarter (Q4FY19), banks can surprise positively. Some infra companies will most probably see a seasonally stronger March quarter but with higher receivable days. Autos and IT companies could see some margin disappointment, while cement companies could see dual benefits of falling input costs as well as some pricing improvement. From a tactical perspective, after performing poorly in the past few quarters, the cement sector is well positioned to surprise on the positive side in Q4.

What about real estate and construction-related sectors?

We expect well-organised, well-managed real estate players to grow market share. Significant recovery in the real estate market may have been delayed due to the liquidity crunch in non-banking financial companies (NBFCs), but the organised real estate sector is seeing an improving trend – albeit from a lower base –which makes it a good long-term buying opportunity. Companies that are catering to the low- and the middle-income categories could do well in the medium-term. We are also positive on housing-related construction materials and related sectors. From a 12-18 months’ perspective, we believe the segment could outperform the broader equity market.