Congress win in Karnataka may test 10,000 on Nifty, says Jigar Shah

We expect Nifty50 range of 10,000-10,500 based on a 20 per cent earning expansion for CY2018

With less than a week to go for the Karnataka assembly polls, Jigar Shah, chief executive officer, Maybank Kim Eng Securities, tells Puneet Wadhwa that the markets have not factored in the possibility of a loss for the Bharatiya Janata Party (BJP) yet. He says, the March results season is on the expected lines so far. Edited excerpts:

Are the markets factoring in the possibility of BJP’s loss in the upcoming Karnataka assembly election? 

The markets are not yet factoring any possibility of an NDA (National Democratic Alliance) loss in the Karnataka assembly election. They would be nervous and may test the recent 10,000 level on the Nifty50 again if there is an outright Congress win. However, if it is a hung assembly, it may go down only marginally because the trend cannot be extrapolated on a national basis. A favourable outcome, on the other hand, will be an absolute majority to the BJP in which case the market should hold its level. 

What are your return expectations from the markets from a year's perspective?

We expect a Nifty50 range of 10,000 – 10,500 based on a 20 per cent earnings expansion for calendar year 2018 (CY2018). If the earnings falter significantly from expectations, which they did in the past few years, there are not many catalysts in the election season. Volatility is likely to be more due to the state election outcome and build-up to the general election. The market could break this range on either side on a sustained basis if strong political indications emerge. 

Nifty50 can break 10,500 decisively and make a new high over and above the previous high of 11,200 if the BJP wins the general elections scheduled for 2019 with an absolute majority. On the other hand, if there are significant indications of a coalition, it could slide below 10,000. However, such strong indications may not be forthcoming until the fourth quarter of CY2018, and hence, the market could remain locked in a narrow range. On a bottom-up basis, stocks with good fundamentals could provide sharp returns.  

How are the foreign institutional investors (FIIs) viewing developments in India? 

FIIs remain constructive on the Indian economy and market potential for the medium-to-long term. Notwithstanding their recent selling on account of the negative impact of rising crude oil prices and fiscal deficit miss, India remains an attractive market for the foreign investors given its demographic dividend, political stability, judiciary system and fast growth potential. Their key concerns at present are the stability of the government (i.e. in the next term and no surprises) as well as the quick and sound resolution of the asset quality and capitalisation of banks. 

What are your key takeaways from the March 2018 quarter results season?

The March 2018 results season is on the expected lines so far. Cement, auto and consumer companies have performed well. Banks engaged in corporate lending are likely to reflect increased provisions, which may keep the overall earnings subdued. Retail-facing lenders, including non-banking finance companies, are reporting robust earnings. The stress in telecom is evident. 

The earnings of the infrastructure sector are mixed and there is no specific trend. Software companies have reported results in line with analyst estimate. For FY19, an overall earnings expansion of 15-20 per cent is expected due to a low base and improvement in the rate of growth of GDP (gross domestic product) to over seven per cent from around 6.5 per cent for FY18. 

Do Indian markets look overvalued at this stage?

The markets are reasonably valued even though at a slight premium to the long-term price-earnings ratio (PER) of 16 times on a one-year forward basis. The market PER should hold its level if there is no major disappointment on the earnings front. On a bottom-up basis, there are good opportunities in the small- and mid-cap segments due to sharp corrections across sectors/stocks. 

What are your stock preferences?

In the large-caps, we like HDFC Bank, IndusInd Bank, ICICI Bank, Bajaj Auto, Tata Motors, Mahindra & Mahindra and Power Grid. Among the mid-caps, we like Sterlite Technologies, Coffee Day Enterprises, Himadri Chemicals, Edelweiss, Capital First, DB Corp and Jagran Prakashan. In the small-cap segment, we like Take Solutions, Srei Infrastructure Finance, Hindustan Media Ventures and Allcargo Logistics.