Crest Capital’s Vikram Kotak Sees More Negatives Than Positives For Indian Markets

Indian markets face more negatives than positives and further correction is likely, according to Vikram Kotak of Crest Capital & Investment.

Kotak, managing partner at Crest Capital, highlighted five key factors to watch out for: rising crude prices, a weakening rupee, handling non-bank lenders’ concerns, earnings downgrade and the upcoming elections. “One may see another 5-7 percent correction if these factors do not play out well,” he said in an interview to BloombergQuint. “The headwinds may further end up fueling the twin deficits as the elections approach.”

Indian equities, Asia’s top performer until recently, erased yearly gains and fell 10 percent from its highs amid a flurry of bad news, from surging oil prices and a slumping rupee to a rout in non-bank lenders following defaults by Infrastructure Leasing & Financial Services Ltd. The broader Nifty 500 Index has fallen nearly 14 percent from its record, while the small- and mid-cap indices corrected nearly 37 percent and 24 percent.

Kotak said mid- and large caps could fall next. “The valuation froth has been skimmed from the small-cap stocks. One can expect further corrections in the large- and mid-cap space if the uncertainties continue.”

While uncertainties remain, he said investors can invest selectively in cement, private sector banks, and drugmakers. On the flipside, he advised caution on the consumer stocks, citing stretched valuations.

Watch the entire interview here

Here are the key highlights from the conversation:

On GDP Growth

• The growth momentum will slow down with elevated crude prices, increasing rates and tighter liquidity.
• Rise in raw material prices will impact growth in the auto sector.
• Expects growth to be 7.2-7.3 percent in the year through March 2019.

On Crude Oil Prices

• Crude prices likely to remain lower given the fundamentals.
• Issues with Iran and Saudi Arabia could push prices higher, putting further pressure on India’s current account deficit, rupee, interest rates and liquidity.

On Equity Markets

• Expect Nifty 50 to be around 11,000 levels if the crude oil prices fall by $5 a barrel.
• Some stocks and sectors already looking attractive post the recent market correction.
• Foreign investors selling is a major near-term risk.
• SIP money is the silver lining; right time to invest in mutual funds.

On Earnings

• Earnings have been positive so far.
• Expect a downgrade by about 3-4 percent, impacted by sectors like automobiles, NBFCs and consumer.

On Various Sectors

NBFC

• If liquidity concerns persist, they will impact NBFCs.
• Expect the growth to slow down in the next six to 12 months to about 18-22 percent from 35 percent.

Private Sector Banks

• Bullish on private sector banks as a lot of mess has been cleaned.
• They are likely to gain market share from NBFCs.
• Can give decent returns irrespective of market conditions.
• Have greater room for growth with a stronger retail book.

Pharma

• One of the favoured sectoral bets in the medium term
• The U.S. generic pricing pressure is almost at the bottom.
• Pharma has a strong balance sheet, management return on equity and good new product launches.
• Opportunity looking extremely good for an absolute return.

Cement

• Expect cement stocks to gain on the back of a pickup in demand by 8-10 percent over the next five years.
• Expect a slower capacity expansion and higher growth.
• Depressed valuations within cement allow a good entry point.

Consumer

• Prefer staying away from the sector as stocks are expensive.
• Rural demand on the consumer side will remain good.