Markets have been on a recovery mode, extending gains for ten straight sessions. Narendra Solanki, Head- Equity Research Anand Rathi Shares & Stock Brokers believes that now downside risks are limited.
In an interview with MintGenie, Solanki said that he expects the market to remain in range in the near term with positive bias. He prefers the Financials, manufacturing, chemicals and IT sectors.
Edited excerpts:
What do you think of the current market rebound? Is it sustainable?
The current market rebound has been broad-based and in line with the global markets. We believe the downside risk is now limited, with the crude and commodity prices cooling down keeping inflation in check. Demand has also in general remained buoyant. Also if you see recent quarterly results, most of the companies have posted good results and larger revenue growth momentum has been sustained and margins were also better than expectations.
Do you think, post the recent surge, the valuations have become more expensive than what would be ideal?
The valuations are still not as high as they were before the selloff and also the stock-specific opportunities are still there in the markets.
However, broadly we expect the market to remain in range in the near term with a positive bias, the downside is limited as the macro-economic risk factors have eased and corporate results have been more or less in line with estimates.
Do you expect a reversal in this trend in the near term? If yes, how much do you see the markets declining?
Don't see any major risks to the markets on the domestic front while the global also looks stabilising now as we can see inflation coming down all over the globe as supply chain issues easing out and expectation of further cooling off in prices from here till next year. We believe the trend will sustain here for some more time.
FIIs have also turned positive after a massive exodus since October, why do you think they are now turning positive despite Fed tightening?
India has witnessed an outflow of ~$30 billion since the start of 2022 due to weak INR vs USD, the strong dollar index, aggressive rate hikes and continuing rise in Inflation. With INR showing some resiliency against the dollar, declining dollar index and softening inflation coupled with hopes of a pause in rate hikes by the Fed next year is bringing FIIs back to emerging markets as India continues to be one of the fastest growing major economies.
For which sectors do you believe the valuations are reasonable, if not cheap?
Stock-specific opportunities are there in most sectors. On a sector basis, Financials, manufacturing, chemicals and IT look reasonable. Also, We are seeing India’s real estate sector is favorably placed. Affordability of real estate is among the best in the last 25 years, with moderation in property cost and a rise in annual income. Improvement in the sector is evident from the pick-up in stamp duty collections and property registrations in major states since the pandemic. The second is the power sector. Considering the changes happening across the globe, while giving utmost thrust to adding renewable capacity, a need has been felt for adding some coal-based capacity as it will provide resilience to the sector for meeting the increasing demand. The sector is going to see substantial capacity addition over the next decade.
Where do you think investors can make money in this current environment?
As the Indian economy continues to recover from COVID-related blues we are seeing a strong rebound across sectors. Top private sector banks, automobiles & ancillaries remain our top picks amidst a rising interest rate scenario and sharp recovery of auto sales due to improving rural demand, especially in two-wheelers is expected to drive volumes to 2-wheeler auto companies. Apart from this due to buoyancy in Industrial production Capital goods and engineering, and chemicals remain a good pick for investors.
How would you approach the new age firms like Zomato, Paytm, Nykaa to post their earnings?
No stock-specific comments, however, COVID-19 resulted in a boost to the internet economy as intermediaries across the value chain (including consumers, suppliers, and wholesalers/distributors) came to appreciate the importance of convenience, efficiencies and safety derived from internet-enabled solutions. While India’s digital journey has been remarkable, there is significant headroom for growth - expected to be bolstered by the availability of internet access as well as the impetus provided by the Government of India towards digital inclusion. India will continue to grow across the digital use-case funnel, as there is substantial scope for growth at each level. Additional enrichment like the affordability of the internet, continuous improvement in telecommunications infrastructure, increased adoption from Tier 2+ cities, rising popularity of social media, competitively priced online offerings, growing trust and adoption of online payment platforms all contribute to developing this further.
What about broader markets? Yes or No? and why?
The focus for the RBI has shifted to combating inflation and therefore consensus expects rate normalisation cycle to start in H1 FY23. The RBI expects real GDP growth to moderate to 7.2% in FY23 owing to weaker global demand and rising cost pressure. Despite minor growth downgrades, India’s overall growth is likely to remain healthy led by urban consumption and gradual capex recovery. Also, higher forex reserve cushion is helping the RBI to mitigate INR volatility. The growth trends may continue in a year when the balance of payment surplus could shrink. Against the uncertain and quickly evolving backdrop of geopolitical issues, higher oil prices and hawkish pivot by key global central banks, it is expected that the RBI will continue to gradually tighten over the course of FY23. Overall, India is likely to experience a combination of high growth and inflation where risks are balanced and dependent on the outcome of the Russia-Ukraine crisis and any subsequent Covid-led disruptions.
PSBs have posted extremely good results in Q1, what's your position on them? Apart from SBI, which is your top pick?
Apart from SBI, we like Indian Bank. Indian bank is a mid-sized bank in the public sector, with a loan book size of Rs. 4.3 lakh crore and deposit base of Rs. 5.8 lakh crore. Allahabad Bank was merged with Indian Bank on 1st April 2020 and operates through a network of 5,721 domestic branches. During the first quarter total business grew by 9% YoY with deposits up by 8% and advances at 9%, while on a QoQ basis, deposits declined by 1.6%. Advances growth was supported by 12% YoY growth in the RAM segment while corporate book showed a decline of 3%. PAT grew 23% sequentially and 3% YoY to Rs. 2,219cr. The GNPA ratio fell 34bps q/q to 8.1% due to higher write-offs. The bank’s overall collection efficiency (CE) slightly decline to ~94% in Q1 FY23, from 95% the quarter prior. We have valued ~0.5x P/ABV multiple on its FY24e book. The bank is one of the best-managed public-sector banks and we are positive about management’s ability to deliver on its loan-growth targets.
