Nifty@20,000 is a given; earnings the next trigger: Manish Sonthalia

"When it comes to earnings growth, the next round of rally is going to come from largecaps per se and this is going to be led by four major sectors which are going to be technology, industrials, banks and consumers. One has to pick and choose between these four sectors and that is how it will be for the next two to three years," says Manish Sonthalia, Director & CIO, PMS, Alternates &Offshore, MOAMC.

We are at an all time high, plus minus 1% here or there but frankly there is no zing in the market, nobody is excited and there is no euphoria. Why is that?
I would want to believe that beyond a certain point in the markets, the people were sceptical of the market moving higher and mutual funds have been sitting on 5-10% cash. Also, FIIs are probably not ready to buy in a big way. All these factors may be contributing but I believe that there is a lot of upside left in the market given the way earnings have shaped up or are likely to shape up in FY23. There is FOMO (fear of missing out) in the market and that also making the market move up.

Everything has gone right for us; crude, earnings, currency, uptick and robustness of the banking sector. So for markets to go higher, what could be the next trigger?
Earnings growth for the Nifty is resting on four pillars – BFSI as a whole, technology, consumer stocks including autos and rest of the pack including industrials and capex related themes. As long as these four pillars keep on firing, there is enough ammunition on the tables for the markets to move higher.

If you see the last quarter’s numbers per se, two sectors were actually holding out and this was the banking pack and technology as a whole. There has been some valuation correction but earnings have held on for these two sectors. Rest of the pack are basically suffering from margin pressures. Now that margin pressures are abating given that commodity prices have come off and inflation is cooling. Also crude prices have come off and all of this would have a positive rub off effect on margins going into the second half of this year and fiscal 2023. So these four pillars would likely push earnings growth and that should keep the markets moving up.

I can see a lot of banks in your portfolio. Is there a conscious reason why you have changed it?
No, not at all. In fact, we are equal weight, if not slightly overweight on IT as a whole even though we have seen higher levels on IT stocks and there has been some valuation correction. BFSI is right up there because we think BFSI perhaps would lead from the front whether it comes to NII growth or whether it comes to operating leverage playing out through cost advantage. Clean balance sheets of banks are leading to lower provisions and all of this is culminating into decent profit growth both for PSU banks as well as private sector banks. So there is no question about banks per se as we move into FY23 and FY24.

The economy as a whole is firing on all cylinders and balance sheets have got cleaned up. That is rubbing off on the numbers of banks. When it comes to IT, I would believe that margins have bottomed out and there could be some volume slowdown as we move into FY23 and compare that with FY22 but valuations also have come off. So, anywhere between 1-1.5 PEG for IT as a whole would be a case for decent investment in IT stocks because the journey is not yet over.

It is a five-year story going forward and there is a lot of top line that is likely to come from many of the decent IT names that we have. That is the reason we are slightly overweight on IT as a whole. I think in the second half of FY23 we should again see IT coming back. We were quite overweight on automobiles in any case, We still are overweight and there is some slowdown post the festive season which is likely to play out but again margin pressures will go up and pipeline and pent up demand would fall.

Back in August, you had said you are not going to see 15,000 on the Nifty again and it is not a bear market rally. You are certainly sounding very optimistic and bullish as we go into the New Year. Any predictions on what kind of levels we are likely to see for the Nifty in the new year?
I think 20,000 on the Nifty is a given next year. We are clearly poised higher rather than lower. India is one of the largest economies which is going to grow in high single digits even in FY23 while there is gloom all over the world. I believe institutional investors, particularly foreign institutional investors, which have been great sellers in the last one year, will come back and increase India allocation.

In any case, DIIs have been buying all through and that is not likely to slow down. So where are they going to get the good stocks? So much selling and buying is going to come from domestic as well as foreign investors and there is not enough floating stock available which is going to lead the markets higher. So the markets have become extremely broad-based and the journey is likely to continue.

So 20,000 for the Nifty is a given but do you think it will be like 2020 where after the pandemic outbreak, after the first crash, everything went up? One is still waiting for the momentum in the broader markets even as the delta and valuations between the largecaps and the broader markets is only getting smaller?
I do not believe that largecaps have to lead the markets again, going constantly higher because the valuation gap between the largecaps and midcaps have converted significantly. If the markets were to hold, then obviously it has to be led by earnings and 50% earnings is led by Nifty 50 or NSE500 or BSE 30.

When it comes to earnings growth, the next round of rally is going to come from largecaps per se and this is going to be led by four major sectors which are going to be technology, industrials, banks and consumers. One has to pick and choose between these four sectors and that is how it will be for the next two to three years. If one focuses on these four sectors, they will be better than the entire benchmark Nifty earnings for over next two-three years.

Looking back and looking at how strong the PSU rally has been including banks year to date, I do not see very many PSU names in some of the key portfolios that you hold?
We have Container Corporation, we have included BEL and we had moved out of HPCL but I think in the case of PSUs, because of the inflation and all of that surrounding the global market, there is a shift away from growth investing to value service. So PSUs fit the mantle of the traditional definition of value. We have seen how wealth is going to get created in the PSU pack as a whole but right now it is just a play on value as a whole.

It makes sense to stay with the monopolistic PSU stocks when it comes to creating alpha. We have Container Corporation where there would be some divestment and be it Delhi Mumbai Cargo and the DFC is also around the corner. More asset terms, more margins, more ROAs or whether it comes to the defence playing the entire defence pack is basically the prerogative of the PSU space as a whole.

There is a lot of value because there is a lot of visible growth available in this space over the next many years to speak of but for the rest of the pack, it is just about catching up on valuation because peers and the private sector are valued at X and these PSU stocks are valued much lower. But it makes a case for a tactical trade and that has played out extremely well for the PSU space as a whole which has massively fired over the last one year or so.

One has to stick to one style and whether one is really a value investor or growth investor and since we basically are growth investors, unless it is something of an outlier in the PSU space, we would like to stay away. So, there will be State Bank of India which is the largest PSU bank or monopolistic players like BEL or Container Corporation. We would not like to generalise the entire PSU space.