We have scanned the BJP’s pre poll manifesto and the interim budget presented in February 2019 to capture the key focus areas in future. We have mapped these focus areas with the segments/sectors that will likely benefit in the coming years.
The NDA government came back to power with a thumping victory of 350 seats out of which BJP on its own secured 303 seats. We have scanned the BJP’s pre poll manifesto and the interim budget presented in February 2019 to capture the key focus areas in future. We have mapped these focus areas with the segments/sectors that will likely benefit in the coming years. Based on our reading we feel following sectors could benefit the most in the next one year: capital goods, construction, building materials, corporate banks, power equipment, housing finance companies and rural focused companies. Consumption stocks could take a back seat because of the slowdown in demand and rich valuations.
In terms of market cap orientation we see more value in Mid & Small Caps rather than Large Caps at this stage. Based on Bloomberg estimates the Mid Cap Index is now at trading at 14.8x Fw PE Vs 18.3x Fw PE of Nifty-50. The Mid Cap Fw PE now trades at 19% discount to Nifty Fw PE. From the peak of Jan’18 the Nifty is up ~5% as of 23rd May’19 whereas the NSE Mid Cap 100 Index and BSE Small Cap Index are still down by 20% and 28%, respectively. Time wise 18 months has gone since the Mid and Small caps have seen correction. Local flows, which are the main force driving mid & small cap has seen a sharp slowdown in the last six months. With NDA coming back into power we can expect local investors to take comfort in the mid & small cap space with a longer 2-3 year horizon and inflows could resume in them.
Based on the latest KIE estimates, the Free Float EPS of Nifty-50 for FY20E & FY21E works to 618 & 731, respectively. On these estimates the Nifty-50 trades at 18.9x FY20E and 15.9x FY21E, respectively. The one year Bloomberg Consensus target of Nifty-50 works to ~12,800, implying target PE multiple of ~17x (slightly above the 10 Yr avg Fw PE of Nifty placed at ~16.5x). In a Bull case the Nifty can go between 13,200-13,800 in CY19/FY20 based on higher target multiple of 18-19x on Fw basis (averaging 13,500). If we remove the predicted earnings of BFSI sector then FY20E earnings growth of Nifty-50 comes down to ~12-13%. Hence, It will not be desirable to expect Nifty to trade at 19-20x on Fw multiples for a longer period given the slowdown in many sectors, firm crude prices and global risk of escalation of trade war between the US and China.
In our view priority of the government will be to revive economic growth and investment although the macro-economic situation is quite challenging. There is a need of strong fiscal stimulus but scope of doing so seems limited given high crude prices leading to higher current account deficit and higher fiscal deficit. However, there is scope for monetary stimulus in the form of rate cuts, higher FPI limits for government bonds and infusion of liquidity in the banking system. Government would need to implement further reforms to attract more FDI in various sectors of the economy. Revival of capex cycle and investment of private sector in infrastructure building will be crucial to achieve the desired GDP growth and job creation.
After few days/weeks markets would again go back to basics and factors that will come to the front will be 1) global events like Trade War 2) behavior of crude prices in the midst of Iran tension 3) earnings & valuations 4) RBI policy and 5) Built up to the Union Budget. There are handful of large caps that also look attractive at this juncture. We have highlighted few large cap names (in the below table) from the universe of Kotak Institutional Equities that look attractive at this level.
Post Pulwama attack lot of smart money from FIIs has already come into the market and higher proportion of that has come in the form of passive investment (i.e. ETFs). Hence, we cannot rule out profit booking from these smart investors in the very near future. However, long only money which has been waiting on the side lines by both active FIIs and local investors can come into the market (as there is visibility in terms of government stability for another five years and possibility of bolder reforms).
(The article has been written by Rusmik Oza, Senior VP & Head – Fundamental Research at Kotak Securities. The views expressed are author’s own. Please consult your financial advisor before taking any investment related decision)