What's your outlook for CY20? What are the factors that are expected to sway investor sentiment?
Outlook is positive and more constructive as compared to how the outlook has been for the last two calendar years. We seem to have bottomed out in terms of economic growth as well as markets. On the global front, trade war resolution between the US and China bodes well for the global economy, including India. On the domestic front, government announced a number of initiatives in 2019 which, we believe, should play out over the course of 2020. These measures are privatisation, plan on public investment and infra, auction of coal mines and allowing private players to get into commercial mining. Besides, ground level reforms in the power sector and the labour reforms, that the government has undertaken (subject to implementation) will drive growth.
Do you see a broad-based rally in the new year?
Yes. We have seen an unprecedented polarisation in the market over the last couple of years as only a handful of stocks have drove the rally. Further, this has also happened for the first time that both mid and small caps have given negative returns for two consecutive years in an environment where large-caps have been in positive territory. We, however, believe growth will pick up in 2020 as government has been addressing a lot of challenges and economic growth will become more broad-based. This in turn could lay a foundation for a broad-based rally in the equity market as well.
Is the market valuation reasonable? Also, where do you see Sensex and Nifty by the end of CY20?
A comfortable valuation is always desirable but looking at the valuation from an aggregate perspective may not be very useful. Consider this: In case of Nifty, there are 50 companies where there is a set of companies whose valuations are very high and another set whose valuations are on the lower side. Similarly, in the broader market too, valuations vary. Also, there are a lot of cases of corporate governance and leveraged balance sheets but barring those poor quality names, valuation of most of the companies look reasonable and there is a potential for them to get re-rated once earnings growth comes back. I expect another 10-12 per cent upside in the Sensex and Nifty in CY20.
Your take on mid/small caps. Do they look better than large caps?
Yes, on relative basis, they absolutely look better. The breadth of opportunities in mid and small caps is simply amazing. If there is economic recovery, then there is a possibility that these small and midcap companies will grow at a much higher pace. Additionally, some of these companies have, in a way, set their house in order in terms of corporate governance and balance sheet. So, they present a very attractive opportunity for 2020 and beyond. There's a strong possibility that they will outperform the benchmarks. The year 2020 could be a comeback year for midcaps.
What are your earnings estimates for Q3 and the overall FY20?
For Q3 as well as FY20 earnings, growth could be around 10-12 per cent and that would also be on the back of cut in corporation tax. It will be the single-biggest contributor to the earnings growth.
Government has announced Rs 102 trillion infrastructure plan to boost growth. What's your take on it?
It is a brilliant initiative and very timely announced; however, execution and implementation of the infrastructure projects could be challenging. There has to be very collaborative approach - different parts of the government have to essentially take this as a mission.
Do you see recovery in economy? Where do you see GDP by end of CY20?
Yes. Resolution of US-China trade dispute bodes well for global economic growth and India will also benefit from it. Secondly, I see pick up in investment activity on the back of corporation tax cut. As we progress, many companies are expected to unveil expansion plan. This coupled with infra plan and investment initiatives announced by the government will start playing out during this calendar year.
Given the fact that we hit a low of 4.5 per cent in 2019 and earlier we were cruising along at 7.5 per cent, I believe we will be in the range of 4.5-7.5 per cent by CY20-end.
Your overweight and underweight sectors for 2020.
We are bullish on sectors like consumers and financial services. They would remain the mainstay and core part of any portfolio whether it is 2020 and beyond as it truly reflects India's potential. Other sectors that look attractive are Housing, cement, engineering, hospitality and home appliances.
What has been your investment strategy in the last two years?
We have focused on bottom-up stock picking, and gave utmost importance to quality in terms of balance sheet and corporate governance.
A number of stocks have corrected over 50%. Should one do bottom-fishing there?
Yes, provided they evaluate the balance sheet and governance issues. I think 50% correction shouldn't be the reason to invest. The first filter that one needs to apply is look at quality - balance sheet, corporate governance and then evaluate the company's prospects and at what price, the stock is available.
How is the overall consumption space looking? Should one buy auto stocks after steep decline?
Consumption continues to look exciting and it is the most structural growth opportunity from India perspective. In the short term, the valuation in some of the pockets may look a little frothy but otherwise, in the long-term, consumption is one of the highest potential sectors in India.
I think one could be neutral or rather not invest in auto stocks for now. Within that, passenger cars will remain the most challenging space because it’s not clear whether consumers want to buy an additional new car or do they want to buy a car at all? There are options such as public transport and shared mobility. So, that essentially, is creating headwinds in the demand. Relative to that, the commercial vehicle (CV) space and two-wheeler space looks a lot more promising.
Are PSU stocks good investment ideas? Why/Why not?
Irrespective of whether disinvestment happens or not, there are some PSUs which are doing well in their respective domains as some of them are natural monopolies and some of them are, kind of, well-managed efficient companies. So, one has to be very selective and has to cherry-pick the PSU stocks.
Privatisation is a special situation and one needs to keep in mind that if it happens then it can frontload the return but if it gets delayed, then one should be prepared for that as well. Therefore, one has to ensure that they are comfortable in owning and holding the specific PSU stock even if privatization gets delayed or postponed.
Your view on IT sector.
India's IT sector has been globally competitive and they are addressing a very large opportunity. Most of the IT companies have grown in high single-digit or low-double digit and that kind of growth profile is quite sustainable for the foreseeable future.
Some of the companies have indeed corrected and every company has their own business models. Of course, one client addition/deletion can alter the growth profile in the very short term but I think most of these companies are very resilient and have the ability to bounce back in terms of their growth going forward. From a medium to long-term perspective, one should be positive on the IT sector and also selectively look at midcap IT companies.