Over the longer term, Sensex has the potential to reach 50,000 anywhere in the third year of Modi's second tenure, said Rusmik Oza, Head of Fundamentals, Kotak Securities in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpts:
Q: Considering the volatility in the market, what is your advice to investors and traders?
A: Nifty will remain volatile from here till budget. If Nifty goes to 12,000, it will be trading around 19x Fw PE, which is closer to its previous peak in terms of valuations.
It is ideal to buy July Nifty Puts to hedge the portfolio or protect any potential downside if the Budget disappoints. We are slightly concerned about the upcoming earnings season that could disappoint and lead to lowering of full year estimates.
Over the longer term, Sensex has the potential to reach 50,000 anywhere in the third year of Modi's second tenure.
Q: NBFCs have been struggling for several months now. What would be better - holding the stocks if you own any, staying away or switching to banks?
A: We are positive only on the larger NBFCs, which have strong parentage. Most of the smaller NBFCs having higher exposure to builder financing could face difficult times in future. Funding for most NBFCs is still a challenge that will lead to slower business and a hit on margins.
It is wise to stay invested only in larger NBFCs with stronger parentage and good technology backbone. We would strongly recommend moving out from richly valued NBFCs and smaller NBFCs to corporate banks (as recoveries could lead to a big spike in profitability).
Q: What are your top six ideas for someone who wants to build a portfolio?
A: We like SBI and ICICI Bank as profits could rise in multiples rather in percentage in the next two years. This will lead to return on equity moving to or beyond 15 percent, which will lead to re-rating in their valuations.
We like L&T as it is one of the few companies that have the capability to take and execute large ticket size orders. L&T trades at reasonable valuations of 21x on forward PE.
In the NBFC space, we like M&M Financial as we expect earnings to grow at a CAGR of around 18 percent in the next two years. It trades around 2.1x on FY20E Book Value.
In the mid-cap space, we recommend NCC in the construction space because of a strong order book and reasonable valuations.
Himatsingka Seide is another midcap we like as it trades cheap at 8x forward PE with 15 percent return on equity profile.
Sectors to avoid are cement, consumer staples, smaller NBFCs, technology, oil & gas and metals.
Q: From a policy standpoint, is more rate cuts only way to address the slowdown in consumption and economy?
Q: We feel RBI has more room to provide monetary stimulus by way of further rates cuts. Considering the slowdown being witnessed in many sectors and keeping in mind the liquidity crisis in the NBFC space, it is imperative for RBI to take more monetary steps.
We see less room for fiscal stimulus as government spending is already on the higher side and managing Fiscal Deficit is also important.
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