Edelweiss Securities will continue to remain buyers in Indian equities at the current level as the brokerage expects another 12-13 percent upside from here, its head of research for institutional equities, Aditya Narain said.
Narain is not worried about the ongoing correction as he does not see that as a directional move, he said on BloombergQuint's weekly series, Thank God It's Friday.
The brokerage continues to remain overweight on banks but Narain pointed out that the progress on asset quality issues is happening far too slowly, keeping most market participants cautious on the sector. A few positive surprises from the insolvency resolution process can, however, change the mood dramatically, he added.
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Here are edited excerpts from the interview.
September has been volatile as far as markets are concerned, some of which has to do with concerns around Indian macros. Are these concerns on economy valid or overstated?
Fundamentally, these are issues that one needs to contend with, particularly, the whole issue of job creation. But the way it's all suddenly came up in the middle of September is a little exaggerated. This scenario has existed for a period of times. But it boiled over in terms of the public's imagination or the markets' concern. But, it's not new in terms of what effectively has happened.
Do you think the GST-related pain will last for few more quarters and not just vanish at the end of Q2 as everybody was expecting?
There are two parts to it. One is the executional pain, which is issues of paying up and not paying and the disruptions of that nature. That will be done by the end of this year. I don't think that will be much of an issue. The other bit is, the fundamental shift that is happening to regular businesses or to tax-paying businesses. That could extend a little bit longer. But the bulk of it you will feel in the quarter that's more or less finished and the next one or two quarters. So, there is that distinction. People are clubbing both of them together, between the operational aspects of it and the structural shift that is happening.
A lot of people are talking about a 5-10 percent correct as acceptable in any long-term uptrend. Are we in the midst of a correction given the valuations or is just a healthy correction that we are seeing?
I tend to believe that it's the healthy correction, cooling off a bit of froth rather than anything that is directional. I think it's far too premature. The premise of the upcycle that people are seeing is still very much existent. The macro remains robust. Nothing globally is changing materially apart from North Korea, and those are political issues rather than economic issues. So, in that context, it is just a healthy correction.
To buy or not to buy...that's the question on investors' minds? What would your advice be to investors right now?
We would be buyers. Our stated view is that the market is going to be 12-13 percent higher by the middle of the next year. So every time you get pullbacks like these, it just creates a little bit more of opportunity. I fundamentally believe that the markets will remain valued up and the trajectory of both the economy and the cyclical elements of it are on the right side. So, once you are in the right side of a cyclical and structural move, I think it is a question of the opportunity that comes when the markets fall off.
According to SEBI guidelines, companies will now have to start disclosing if they are missing out on a single repayment, whether it is interest or principal. Could we see a negative impact on banks and NBFCs and also on highly leveraged companies?
As far as the highly leveraged companies are concerned or the listed companies are concerned or the companies that fall under SEBI's purview, I think a lot of people are looking at them with a great deal of scrutiny in any case. I don't think that's where the big challenge will be. The challenge could be at the lower levels which SEBI has nothing to do with, which is the unlisted space, which is where you could get better trends in terms of what's happening. So, I don't think it will be that much of a shaker. What you will have is a couple of surprises. It won't be market-wide but what you will end up with is a couple of companies that have fallen below the radar from an asset quality issue, will suddenly pop up.
Do you think it's time to allocate some money in information technology given the kind of underperformance that we have seen?
If you want to be defensive from a portfolio perspective, that's where you go. If you have a specific stock in mind, we think there are a couple of smaller caps which might have more momentum, then that's a place where you could put a little bit more money. But on the portfolio level, we believe you should be aggressive. That [IT] is the more defensive space to be in.
What's the stance that you are taking on banking right now?
Fundamentally, we are overweight. We have a huge overweight on that space. Within that, it's evenly balanced between the retail banks and the wholesale or the corporate banks. Probably, a little bit biased towards the retail space. In terms of the whole shift to IFRS and the second list [of stressed accounts] that has come out and the challenges it can create, I think the bigger issue is, what is the trend as far as the underlying is concerned rather than how it gets accounted for. To some extent, the trend has been pretty flat. You have not seen an improvement which is what the markets will like, but you haven't seen a deterioration either. From an NCLT perspective, the processes are much more streamlined. I would tend to believe that the market remains fundamentally very cautious on this space, the underlying remains stable. You could get some positive or negative surprises as the NCLT process moves on. But all it requires is one or two positive developments in the form of a bidding war that happens for some assets that are being sold and that can effectively change the mood a lot.
There is an issue with asset quality. It's improving far too slowly relative to what the market requires and what we had actually argued for. But I don't see these accounting issues becoming bigger but it's the underlying issues where you need to see a clear trend.
GST could have some negative implications as far as asset quality is concerned. Is the asset quality picture something that we should start worrying about again?
It's something that you need to watch because you don't know the extent of damage this will cause. And it's not as if you will see it upfront. I think that's where people missing interest payments comes into play but the SMEs don't fall into that space. But that could be a risk element. What the market has not been able to fathom, either on the upside or on the downside is the transition pain, risk and timing of GST. So, this is one of those variables that you would have to watch for.
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Where do you see growth coming from? Is it rural or urban consumption?
From our perspective, from the urban side. Discretionary consumption whether it is apparels, cars...that's the space that is running well, irrespective of what the market feels or how the market moves. That has hit a J curve which should continue. We would be much more comfortable in that space, given that it's a trend that's set in, there are structural elements, easier credit which will continue to drive that. As far as rural is concerned, it requires a little bit of a kickstart. You have not got enough of it from a policy perspective. The monsoon has been relatively mixed. To kickstart something is a lot more challenging than to stay with something that's moving.
Is the state of the rural economy something that you are worried about, especially given the monsoon deficit that we have seen or that the rural economy has not recovered from demonetisation? Is that one of the concerns?
Our fundamental concern is more in terms of job creation, whether it be urban or rural. So, to that extent it doesn't lean towards rural. As far as the monsoon is concerned, we have argued very elaborately that monsoons don't make much difference. It's more in terms of global commodity prices and the buffers you have globally and locally. So this slightly weaker than initially expected monsoons will not tend to make too much difference. And third things is about kickstarting something, which as I said, has always been harder and that's what the rural side requires which it is not getting at this point in time, either from a policy perspective or from external elements like the rains or any other pronounced shift that is happening towards the rural side.
Then what about the government's target of doubling farm incomes in the next five years? Couldn't that be a big kick for the rural economy?
You need to see specifics. If you can double farm income in five years then that means 15-16 percent per annum compounded growth. That is a huge amount but you have to see how they are going to do it.
So, you have to see something that come through in specifics before one can make the call that they will be able to double their incomes. As things standard, there be a challenge.
Watch the full interview here.
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A lot of the housing finance stocks have run up on the back of the affordable housing push of the government but otherwise, loan growth seems to have slowed down. Is it time to be circumspect on these companies?
Structurally, it's a very good space. The pace of the ramp-up that the market expects now may be a little ahead of the delivery. It's a question of are you overvalued for tomorrow or day after. If you are not overvalued for day after, you don't have too much risk. If you are overvalued for today, then may be a little bit. As long as you keep the credit and economics right...the challenge with a high growth area is the so-called per unit pricing discipline tends to go away. As long as they can maintain that or if rates continue to be soft, I don't think it should be that much of a challenge. But, they are factoring in a lot. Any lack of response from them will seem to be a pressure points for these stocks.
Any thoughts on insurance and valuations?
One of the themes we are pushing is the saving side and the liabilities side equation in the economy. That will last for a large period of time. We tend to believe that rates will drop off more then what is generally is being seeing from a cyclical prism. In that space, this whole area is a very interesting place to play. You have seen a lot of natural market consolidation in the sector where the top 4-5 are running away with the market and they are getting all the economies of scale. A lot of these players will be very interesting entities to play because this is a structurally longer-term theme. They have come out from their initial growth bubble or excess build out challenges.
Most of these are very clean businesses in terms of books and the cost structures that they are running. That's make it a lot more comfortable. This is not a first-time bull run. This is a second-time bull run and that is a much better place to be in than has been the case with insurance in the past.
Where will be your preference lie between ageneral and life insurance company?
Very fundamentally, the life insurance space is a more attractive space to be in because that's where the entire consumer market plays out and you get business for a much longer period of time. So, life insurance would be a stronger place to be in than general.
What about industrials and cyclicals? Clear no-no right now?
In our portfolio we have got industrials as an overweight but it is not so much the capex heavy industrials, it is more the consumer durables which fall under that space. From a pure cyclical industrial space, we tend to be a little measured. Our view is that the capex cycle will take a little more time than what the optimists expect. In that context, the stocks are a little expensive. The other thing is that there is a reasonable glut of capacity when it comes to this whole industrial side, globally. If that is the case it will come down to India too if there is a demand surge. You might get some volume but you won't get volume with price. I think, you will get lesser volume and lesser price than the optimists expect. So, you will see some uptake but not enough to drive this stocks from where they are at this point in time.
A word on commodity-linked stocks, whether it is metals or energy companies?
We like that space. We think that there is a little bit more tailwind there. We think India as a market is good. There is a certain amount of protection these guys have. There is a second bull run for a lot of these companies, so they are much cleaner. So, we like that space and it's an overweight in our portfolio. And we particularly like zinc and aluminium.
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