Indian market remains a buy-on-dip one: Prabhat Awasthi
Interview with Managing director and head of equity at Nomura India
 "Indian market remains a buy-on-dip one: Prabhat Awasthi")
Global markets have staged a recovery in March after a subdued start to the year. Prabhat Awasthi, managing director and head of equity at Nomura India, tells Puneet Wadhwa that the risk-off sentiment can make a comeback in case the global data get worse. “We also have issues like Brexit and lingering uncertainty on Chinese economy and currency that can spook markets... Possible future risk to equities will largely come from global issues,” he says. Excerpts: We have seen a sharp recovery in the markets this month. Is the rally sustainable?
The road ahead for the markets will depend on how the global markets and the risk environment pan out. It is also a fact that the Indian markets had been punished excessively in February. As a result, the bounce-back has also been equally sharp as risks have eased. Partly, it was also helped by the fact that the investors were nervous going into the Budget, and nothing negative has come out in the Budget, which is a relief for the markets.
While we are not in a bad place as an economy, to say there is no risk for the markets, given the fact that global data economy is not out of the woods, is probably a naive statement. We can get a risk-off sentiment back in the latter half of 2016. But, I think the valuations had become very compelling when the markets fell, making them ripe for a bounce-back.
Would you classify India as a ‘sell on a rise market’ or ‘buy on dips’, say from a year’s horizon?
Our fundamental belief is that the economy is improving. So, I will not say that India is a ‘sell on a rise’ market — primarily because we believe there is a genuine improvement in the domestic economy. It is a “buy on dips” market.
What are the key global and domestic factors that can spoil the party for the Indian equity markets, and what is the probability you attach to these events materialising?
The key global factors are the fact that we still have a very weak global economy as evidenced by a spate of data. In case the global data get worse, then we have a problem, which can lead to risk-off of sorts. We also have issues like Brexit and lingering uncertainty on Chinese economy and currency, which can spook the markets. I believe possible future risk to equities will largely come from global issues.
India is already an overweight market for foreign institutional investors, and given the volatility, I am not sure if they would hike allocation. So, a buy call might not happen only for India alone. Global events will dictate the trend for flows, and this is something investors need to keep in mind.
We expect the market to look past the Budget to other possible measures such as goods and services tax (GST), the Bankruptcy Act and power sector reforms such as UDAY (Ujwal Discom Assurance Yojana). We have a published target of 15-25 per cent rise in the Nifty 50 from January 2016 levels. That is, 8,200-8,500 levels.
Will 2016 be the year of mid-caps? If so, which sectors and stocks from this segment are you overweight and underweight on?
I don’t think so. We have seen one round of correction in the mid-caps that rallied last year. I don’t think there will be a repeat
rally in the mid-caps, which is much ahead of large caps. The markets, I think, will be driven by economic recovery. We cannot make an investment case solely for mid-caps and ignore large-caps.
What are your preferred picks in the large-cap segment?
Our analysts’ top picks for the year are Axis Bank, Larsen & Toubro, Indian Oil, Maruti Suzuki and HDFC Bank.
The road ahead for the markets will depend on how the global markets and the risk environment pan out. It is also a fact that the Indian markets had been punished excessively in February. As a result, the bounce-back has also been equally sharp as risks have eased. Partly, it was also helped by the fact that the investors were nervous going into the Budget, and nothing negative has come out in the Budget, which is a relief for the markets.
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While we are not in a bad place as an economy, to say there is no risk for the markets, given the fact that global data economy is not out of the woods, is probably a naive statement. We can get a risk-off sentiment back in the latter half of 2016. But, I think the valuations had become very compelling when the markets fell, making them ripe for a bounce-back.
Would you classify India as a ‘sell on a rise market’ or ‘buy on dips’, say from a year’s horizon?
Our fundamental belief is that the economy is improving. So, I will not say that India is a ‘sell on a rise’ market — primarily because we believe there is a genuine improvement in the domestic economy. It is a “buy on dips” market.
What are the key global and domestic factors that can spoil the party for the Indian equity markets, and what is the probability you attach to these events materialising?
The key global factors are the fact that we still have a very weak global economy as evidenced by a spate of data. In case the global data get worse, then we have a problem, which can lead to risk-off of sorts. We also have issues like Brexit and lingering uncertainty on Chinese economy and currency, which can spook the markets. I believe possible future risk to equities will largely come from global issues.
Besides Brexit, are there any other global factors that can spook markets?
Weakening growth amid central bank response, crash in commodity prices are some of the other factors. Weakness in the Chinese economy with possible currency devaluation are also risks. One must realise that we are living in a very weak global economy. This poses issues for the market's sustainability at higher levels.
Do you expect foreign investors to increase their allocation to India over the next six to 12 months?India is already an overweight market for foreign institutional investors, and given the volatility, I am not sure if they would hike allocation. So, a buy call might not happen only for India alone. Global events will dictate the trend for flows, and this is something investors need to keep in mind.
How are the markets likely to react to a slippage in the fiscal deficit target for the next year?
Nomura believes that the fiscal assumptions are largely credible. Assumptions on tax revenues are conservative, in our view. However, assumptions on disinvestment and spectrum auction revenues are optimistic. On an overall basis, we feel the revenue target is credible.
I am not duly worried about spillage on account of non-tax revenues. There can be slippages, but the government does have cushions built in to support this. Had there been any scepticism, the bond markets would have not rallied. I think the markets have figured out that the government's projections and estimates could be met.
Where do you see the Sensex and the Nifty by December 2016-end?We expect the market to look past the Budget to other possible measures such as goods and services tax (GST), the Bankruptcy Act and power sector reforms such as UDAY (Ujwal Discom Assurance Yojana). We have a published target of 15-25 per cent rise in the Nifty 50 from January 2016 levels. That is, 8,200-8,500 levels.
Will 2016 be the year of mid-caps? If so, which sectors and stocks from this segment are you overweight and underweight on?
I don’t think so. We have seen one round of correction in the mid-caps that rallied last year. I don’t think there will be a repeat
rally in the mid-caps, which is much ahead of large caps. The markets, I think, will be driven by economic recovery. We cannot make an investment case solely for mid-caps and ignore large-caps.
What are your preferred picks in the large-cap segment?
Our analysts’ top picks for the year are Axis Bank, Larsen & Toubro, Indian Oil, Maruti Suzuki and HDFC Bank.
Public sector banks (PSB's) have seen a spectacular rally. What is your outlook for this sector especially the PSU banks? What about non-banking finance companies (NBFCs)?
We have essentially been positive on private banks, and that view continues. While the rally in beaten down stocks happens when a market recovers, on a fundamental basis, we continue to like the private players given the balance sheet advantage.
Which other sectors would you now look to add to your portfolio? Which ones could see a lesser allocation over the next 12 months?
We are bullish on domestic cyclicals such as automobiles. We also like the oil & gas sector (downstream companies). That apart, we also like select companies in the industrial sector. However, one must note that the recovery in the industrial sector may not be spread evenly; so one has to be stock-specific there.
We also like the information technology sector despite the headwinds. While the growth is coming off in this sector, the valuations are reasonable. We also like power sector utilities and think that they are decent businesses. While the sector is going through a transformation, government's UDAY scheme should sort out a lot of problems for the sector.
What is the road ahead for corporate earnings for the next 12 months? Do you expect single-digit growth for India Inc for the next few quarters as well given that there is no meaningful pick-up in demand?
The underlying message from the December quarter earnings season is that domestic earnings continue to see a mild pace of recovery from their bottom. However, overall market-wide earnings have been pulled back by global sectors. Additional stress caused by a significant increase in bad loan provisions has put further pressure on overall earnings.
At a broad level, we expect that a clean-up in FY16F should mean better visibility of earnings in FY17F. We also believe that the fact that bank NPAs are now out in the open and getting cleaned up is giving strong accumulation opportunities, especially for private sector banks.
I think there will be a gradual recovery over the next four-five quarters and FY17 will be a much better year for India Inc as compared to FY16. We currently think that the rate of growth could be between 12% - 15% in FY17. However, we need to be mindful of the global factors that can push down these estimates.