CLSA’s India Strategist Says Nifty To Cross 12,000 In Coming Months
CLSA expects India Inc. to post a 15-20 percent earnings growth in the current financial year.
India’s stock benchmark NSE Nifty 50 is likely to cross 12,000 in the next few months, according to CLSA’s India strategist.
Mahesh Nandurkar revised the target higher based on rising investor confidence, improving liquidity and earnings optimism. The foreign brokerage had an earlier year-end target of 11,000.
The growth will be mainly driven by the banking and financial industry, Nandurkar said. “We expect the bank and financial segment to report very strong numbers in FY20. In fact, we will see strong numbers starting from the March quarter of 2019 itself.”
The bullish view is based on expectations that there will be stable government back at the helm post elections. While the market has built a 70-80 percent change of a stable government, Nandurkar said, the rally hasn’t factored it completely.
Besides, global cues are also turning favourable for the rally to continue, he added.
The global investor sentiment towards emerging markets has improved significantly and also their sentiment towards India.Mahesh Nandurkar, India Strategist, CLSA Ltd.
So, what are the big concerns?
It’s mostly the high valuations. With a price-to-earnings multiple of around 15 percent, Indian equities are trading at about 20 percent higher than their historical averages. “That clearly is the worry,” Nandurkar said.
“Many good businesses which the investors wants to own are trading at very high levels of PE multiples, especially on the consumer and discretionary side. The multiples are 35 to 40 times upwards of it.”
The other incremental concern could be the consumption slowdown in the auto sector and the consumer staples, he said.
Other Highlights:
- See scope for further RBI 25-50 basis point rate cut.
- Inflation to hover around 4 percent
- Sees improvement in the investment cycle.
- Expects consumer sector to underperform.
- March results play a big role in determining which way growth is looking like; management commentary critical to learn the impact of consumer spending behaviour.
- Says earnings trend would remain similar for other companies, barring banking and financials and some companies with low base effect.
Watch the full interview here:
Here’s the edited transcript of the interview:
CLSA had pegged the Indian markets and Nifty targets somewhere closer to around 11,000-11,500. We’re right there. Does the current excitement changed the outlook for the rest of the year?
Yes. A lot is being driven by investor sentiments. In the last three months, the global investor sentiment towards the emerging market has improved significantly and the sentiment towards India has also improved significantly. We did take cognizance of that and change some portfolio allocation and we did turn more optimistic on the markets a couple of months ago. We still believe that the valuations are in the higher territory. The Nifty still trades at about 18 times on one-year forward basis. The data point from bottom up basis at the broader economic level or even from the company level doesn’t appear to be all that great. There is a bit of the mismatch between the investor sentiment and the bottom up economic data.
For stock market performance in near term, what matters is investor sentiments. Those are clearly on positive side and therefore we expect the markets to continue to do well for at least over the next few months.
Does that change the target in any way?
I would be looking at the index moving closer to 12,000 or beyond in over the next few months.
21 global investor survey suggested that it is not just the result of the election which matters, but there is more focus on agenda with regards to economic pickup, the growth, and bringing back jobs into the economy. Would you say that all of which we saw in the last one month is a precursor to election results being baked in and that can reverse if results are not favorable?
The market is factoring in for a more stable government at this point in time. I will not say that it is fully baked in as yet. It is never done till the time it is done, as we have seen in the last several election cycles in India and the world. The market is building in 70-80 percent chances of a stable government, but it’s not fully baked in as yet.
The market rally in India is not attributed only to what is happening within India or the political sentiments. But a large part of the rally is also associated with what is happening globally. The Asian index or global MSCI world index, all of them has done well in the last four to five months, between 10 percent and 15 percent. So, India is not the only market. A large part of the rally is more due to the improvement in sentiments of the global investors, due to global factors. Like, we are building in a possibility of a rate cut in the U.S. We are also talking about European Central Bank going very slow. We are also looking at a possibility of resolution of the trade conflict between the U.S. and China. So, there are a variety of global factors which have turned favorable. The improvement in political sentiments in India has added to it.
What do your large global clients tell you when it comes to putting money into India?
The feedback from the global investors is that the primary concern on India is valuations as compared to average PE multiple of 15 times or so. We are 20 percent higher than our historical averages. That is a worry. Many good businesses, which investors wants to own, are trading at very high levels of PE multiples. Especially on consumer and discretionary side, multiples are 35-40 times or upwards of it. So, that remains the concern.
The second incremental concern is coming up at the back of the consumption slowdown. We have seen numbers from auto companies being weak and there was some commentary made by consumer staple companies as well. So, what we see in the March quarter results and the management commentary will play a big role in determining which way the growth is looking like and investors are rightly focusing on it.
The positive side is if we get to see a stable government, then there is that much more predictability of FY20, earnings growth and there will be continuity of policies. So, it is a mix. While the market has factored into great extent the possibility of a stable government, there can still be upside as we get closer to that event.
If indeed the markets are expensive for you clients and largely for other brokerage houses, can money come in the side pockets even if market doesn’t move too much post elections because it stays over valued?
There are several bottom up ideas. There are a few mid-cap companies which are also looking attractively valued. Some of these are on engineering, procurement and construction contracting side. We are excited about the real estate. We believe that the real estate is getting twin benefits of the industry consolidation. Even if a broader market does not do well, the listed companies can do exceedingly well which we have seen in the quarterly numbers and pre-reports which we have seen in the March quarter.
We are optimistic that eventually given six months or so, the broader housing market will also stage a recovery. So, we will continue to stay excited about real estate. There will be some other mid-cap companies. But that will be more bottom up call and more company specific.
Your recent report suggest that you need to start focusing on interest rates regime where most of the central banks have given very dovish commentary. We are on a declining path towards the interest rate cuts. What happens then with regards to financials in India?
We believe that there are two straight rate cuts that the Reserve Bank of India has done. There could be more policy rate cuts going forward. We believe that inflation outlook or consumer price index numbers, 12 months down the line, would still be hovering at 4 percent or thereabouts. Our analysis suggest that food inflation is likely to remain at the lower levels for structural reasons. There could be seasonal and intermittent volatility but if you take one to two year view, the inflation should stay stable and that would leave another 25-50 basis points rate cut by the RBI in the near term and may be more as we go ahead. That makes the case to own the interest rates sensitive here. We talk about property as a key interest rate sensitive. Banks and financials are the other one. The wholesale funded institutions will see more benefit of the falling interest rate environment.
The other big theme which is unfolding in financial space is peaking out of the NPLs. We are on track of it. Private corporate banks and select state own banks will continue to do well going forward.
What could be the big driver, other than the financials?
If I take a longer term view of two to three years, then I feel that there is likely to be a big change in the market sentiments away from the consumption theme and into the investment theme. We have seen consumption theme playing out very nicely over the last five years.
The gross fixed capital formation has bottomed out. The investment cycle will show some signs of improvement. The investor should gradually be making that shift in the portfolio. We have talked about the financials on corporate side. We have talked about property. Property will be the biggest beneficiary of the investment cycle upturn. Others would be EPC contract names. Cement is also a theme which will do well. Incrementally, households which will save and invest more, naturally there has to be some level of moderation on consumption side.
PE multiples on consumption side are at elevated level. The primary reason is a lack of opportunities in other segments of market, primarily on the investment side. If that part of the market begins to do well then money will shift and reallocate more towards investment themes. Over medium term of two- to three-year perspective, we will see a chance that the consumption theme might underperform.
Would the under-performance be the factor of time correction? Or could it be the volume growth numbers?
May be a combination of both or maybe it just happens by a way of time correction, which is also quite possible. If you are looking at earnings growth for the market in a range of 15-20 percent in the next couple of years and on back of it the market continues to move up, then some of the expensive names might just stagnate and undergo time correction. If you take a two-year view, then there is a likelihood of that theme under-performing.
The subset of this consumption theme is autos which have seen signs of slowdown. Do you attribute the non-banking financial companies’ stress as the leading indicator What do you attribute as the reason for the slowdown that we are seeing in two-wheelers too? And when did you reckon it will turn around? Is it too soon to talk about turnaround?
It is too soon. It is not just two-wheelers, but we are seeing the auto sector numbers slowing down across the two-wheelers, four-wheelers, tractors and commercial vehicles. We have seen that the consumer staple companies have also talked about some slowdown in the consumption trend, that they are witnessing. It is not because of the NBFC related concern, but in a combination to the NBFC concern, oil prices are high, maybe there was some regulation which had raised some insurance cost and increase the upfront pricing on the two-wheelers. We will see a slowdown in consumer purchasing too.
The March quarter results and the management commentary will be critical, because it will give an idea that whether the slowdown we are seeing is limited to autos or it is more widespread and visible in other consumer categories as well.
When you are talking about a target of 12,000, are you looking at a particular rate of earnings growth for Indian equities? What will that number look like?
We will be looking at number close to 15-20 percent. One of the primary reasons will be a big swing, which we will see in the banking and financial sector profitability. FY18-19 were bad years for corporate banks and financials, with large amount of provisioning cost. A lot of that will not be there for FY20 and the year-on-year comparison will be easy. We expect banks and financial segment to report very strong numbers in FY20. We will start to see strong numbers from March quarter of 2019 itself. On an overall basis, we are not seeing any big pickup., except for banks, financials and some of the companies with low base effect. For a broader market, the earning trend will remain similar. For reported basis and for overall market, earnings should be 15-20 percent driven by banks and financials.