Brexit is not expected to have a significant impact on the Indian economy, Ketan Karkhanis, senior VP and head of equity relationship service, ICICI Securities tells Rahul Oberoi of Financial Express Online. On the implementation of 7th Pay Commission, he believes hike in salaries of central government employees would lead to higher disposable income, which will eventually help boost consumer demand. Karkhanis sees Sensex near 30,000 while Nifty at 9,100 in the next 12 months. Below are excerpts from the interview:
Q How is the 7th Pay Commission beneficial for equity markets? Which stocks are looking good after the Cabinet approval?
A. The implementation of the recommendation of the Pay Commission would enable a higher disposable income, which will eventually help boost consumer demand, especially in urban areas. The benefits of the same are likely to percolate to sectors such as consumer discretionary, FMCG, auto etc which are expected to witness increased demand.
Q. How do you see domestic equity markets post Brexit?
A. While Brexit is not expected to have a significant impact on the Indian economy, the market did feel some jitters mainly owing to the risk of the contagion effect in eurozone. One of the major fears can be the impact on FII flows owing to an increase in global risk aversion. Having said that, it would be presumptive to fathom any impact as the definite contours of Brexit are expected to take time to emerge in terms of how trade negotiations will take place and eventually what its impact will be on global trade and cross currency movements.
Q. Which companies and sectors may suffer the most due to Britain exit from EU in long run?
A. The definite contours of Brexit will take time to emerge in terms of how trade negotiations take place, which will consequently impact global trade and cross currency movements. However, with the pound under pressure, stocks and sectors like IT and auto (mainly ancillaries), which export to UK or have a manufacturing facility in UK and Europe regions will see this event as an overhang on their future performance.
Q. There are expectations that GST will be passed this monsoon session. In this scenario, which companies and sectors will benefit from the move?
A. Whenever the GST bill is passed in Parliament, the biggest beneficiary will be the organised segment in sectors like logistics, FMCG, consumer discretionary and building materials. The implementation of GST would lead to a shift in demand from the unorganised to organised space, thus enabling market share gains for organised players.
Q. How do you see valuations of Indian equity markets?
A. At the current levels, the broader markets are trading at 17.4 times and 14.8 times on FY17E and FY18E earnings per share, respectively. On an absolute basis, valuations are reasonable while on a relative basis valuations are attractive compared to other emerging market peers that are facing the brunt of the slowdown, a commodity sell-off and relatively higher currency depreciation. Going ahead, we believe that with green shoots visible on the ground, corporate India can surprise on the upside and further make valuations attractive at current levels.
Q. Where do you see Sensex and Nifty by the end of March 2017 and why?
A. While the wider confirmation of a turnaround is yet to be seen, healthy cement volume growth (around 10 per cent YoY), electricity generation growth (7.6 per cent YoY) and revival in two-wheelers volume growth (8 per cent) in Q4FY16 are some of the visible signs of recovery indicating a possible turnaround in FY17. A good monsoon forecast is definitely a positive sign for Indian equity markets. Healthy monsoons are expected to the lift market sentiments and limit the downsides. We expect Sensex EPS to grow 12.1 per cent YoY in FY17E to Rs 1,542 and then showcase a back ended recovery with 17.8 per cent YoY growth in FY18E to Rs 1,816, subject to commodities stabilising. We ascribe a multiple of 16.5 times on the Sensex EPS of FY18E and assign a one year forward target of 30,000 for Sensex and 9,100 for Nifty.
Q. On which sectors are you bullish right now and how do you see them, going forward?
A. We like sectors like auto (benefits of Seventh Pay Commission, lower interest rates and good monsoons will lead to reasonable volume growth), consumer discretionary (pent up demand owing to Seventh Pay Commission and good monsoon, a strong balance sheet coupled with reasonable valuations provides opportunity). capital goods (a gradual pick-up in ordering activity from power T&D, defence, renewables and railways will perk up revenue visibility) and cement (expansion in volumes and positive operating leverage would be a good bet). These are expected to deliver stable growth with relatively lower chances of downgrades in the current economic milieu.
Q. Can you suggest a few stocks for the next 24 months?
A. Our criteria for recommendations is a focus on companies that have exposure to domestic economy and are going to benefit from variables like passage of GST bill, resumption of consumption growth coupled with strong corporate governance practice and healthy balance sheets. Hence, we like companies like M&M, ITC, Bajaj Finserv, Century Plyboard, Container Corporation and Inox Leisure from a two to three year perspective.
Q. What are key risks for Indian equity markets?
A. Medium-term risks for markets include concerns over eurozone, geopolitical tensions, possible volatility in commodities and crude oil prices as a result and a global growth slowdown led by China’s hard landing. These global factors remain a possible spoilsport for the market. On the domestic front, monsoon progress and subsequent earnings improvement would be keenly watched.
Q Which are the sectors one can avoid?
A. We are negative on sectors like banks (plagued by recognition of non-performing assets and increased provisioning, which will make predictability of earnings a difficult task, going ahead) as well as oil and gas and metals (volatility in commodity prices and stretched balance sheets will keep earnings trajectory hazy).
Q Which emerging sectors are looking a good buy in the present markets conditions?
A. We believe segments such as defence, railways and renewables are emerging sectors. However, an investor need to devote at least three to five years as the contours of growth are still emerging and clear winners will emerge only over a period of time.
(Disclaimer: ICICI Securities is a Sebi registered research analyst. The official or his relatives do not have actual/beneficial ownership of 1 per cent or more securities of the subject company, at the end of May 2016 or have no other financial interest and do not have any material conflict of interest.)