While Sensex and Nifty have scaled new peaks of late, only a handful of stocks are driving the benchmark indices up. Achin Goel of Bonanza Portfolio says that in this regard, this rally is strikingly different than the previous ones. He advises investors to stick to stock specific stories, as it will take a while to for confidence to rebuild in the broader small and midcap companies, which are just coming out of a correction.
The firms with no fundamental deterioration in earnings and business growth will recover first, he says. Amid the ongoing rupee depreciation, Achin Goel advises investors to add to their position in IT sector if they are currently underweight. “One should stick to earnings growth where capex are over or almost over. Look for companies which are consumption driven or at least linked to consumption,” he says.
Sushruth Sunder of FE Online recently interviewed Achin Goel, Head of Wealth Management and Financial Planning, Bonanza Portfolio. Achin Goel shares insights on the Sensex rally, depreciating rupee, upcoming IPOs, mutual fund inflows and where he’s finding value in the stock market. Here are edited excerpts:
The Sensex is trading at near record highs, however, the small-cap and midcap stocks have not participated in the rally. What is driving this? Is this different from the previous rallies?
Even as the benchmark Sensex and Nifty cross new highs, this rally is strikingly different than the previous ones. With unsettled macroeconomic situation and a handful of stocks driving the benchmark indices up, the euphoria and confidence in the rally is missing for the medium term. There are only 6-7 index stocks which were seen rallying; otherwise the rest of the stocks were stagnant or correcting even. It will take a while to regain confidence in broader markets in small and midcap companies. Those with no change in business growth and earnings will recover first. One should stick to stock specific stories.
Large cap index stocks have shown great traction in terms of corporate earnings. GST effect has also played out. Last July we had GST enrollment and many of inventories were at factories and this provided a bit of low base for sales in corresponding last year quarter. This magnifies the current result though some of companies are indeed showing true growth barring the GST effect.
In smaller and midcap, buying interest by domestic and foreign institutional investors has been yet not there compared to last year. First very high valuations, then selling as part of regulating the mutual funds as per large cap and midcap definitions followed by ASM and crude prices made small and mid cap to decline one after other event. But situation may not last very long and buying in quality midcap stocks having consistent growth will take place soon.
What is your near-to-medium term view on the stock market outlook?
Market is currently in range of 11,100 to 11,700 in near term as per Nifty options open interest data; in medium term it can touch 12,000 by Diwali; and if double digit earnings growth comes in Nifty EPS then it may even go up to 12,500 by April 2019. EPS for nifty has jumped from Rs 392 to Rs 416 currently.
Given a weaker rupee, we are seeing IT and pharma stocks back in vogue (given that these companies have a major portion of revenue abroad). What’s your take on these sectors?
After underperforming benchmark equity index during the last three years, the Nifty Pharma index has jumped 12 per cent since August so far, whereas Nifty is up around 0.3 per cent. Pharma though looks bottomed out, it will take time to revive in meaningful way. Data integrity issues are past now. Many good companies are clearing USFDA again but it’s specific to high margin, complex generics or injectables that may be fruitful to be back in vogue. It may take 2-3 quarters for such turnaround to start working. One may take positive view from hereon for the long term.
IT is a defensive sector and could withstand any sharp market sell-off. Investors who are underweight IT can add to their portfolio though dollar vs rupee depreciation is helping a lot, there’s still room for rupee depreciation a bit. Most of IT companies are well priced now. In 2-3 company specific stories, juice might be might be left but broader pack is priced in.
Where are you finding value in the current stock market?
One should stick to earnings growth where capex are over or almost over. Look for companies which are consumption driven or at least linked to consumption. Some auto ancillaries where they add value to cars, some banks look attractive at these levels. Banks which are currently on decent ROE, price-to-book ratio, improvements in provisions and NPAs will perform well.
The equity mutual fund inflows have not been robust of late. Do you feel this is a temporary blip, or that we will not see those kinds of higher inflows?
Equity mutual funds saw inflow of nearly Rs 33,000 crore in the first quarter of the current fiscal, a surge of 15 per cent year-on-year, underpinned by strong participation from retail investors. MF SIP flows have not reduced but lumpsum investments might be on temporary hold. They will come back as stability returns.
There seems to be an earnings bounce back in the latest quarter. Which sectors have done well in your assessment, which sectors must investors look at?
PSU banks have done well in terms of shrinking of losses. Private banks have continued to perform well. Consumption, commercial vehicles have done pretty well. Some pharma sectors have shown good traction. IT companies too have posted good numbers as expected.
HDFC AMC IPO seems to have garnered a lot of attention at a time when the primary markets have taken a breather. What are the upcoming IPOs which investors can look to invest?
One may look into NSE, PNB MetLife, Reliance General Insurance, Barbeque Nation and Shakun Polymers, if investors are looking for listing gains too apart from longer term outlooks. Companies with insurances, luxury living, hospitalities will have better chance to generate higher returns.