“We are more positive on the B2B themes rather than the B2C themes. We are also looking at more value focussed plays which we think will outperform. Overall commodity as a space will continue to do well. Metals, mining are areas which will do well. Even agri commodities will do well.”
“We are also seeing inflation as a big theme. Value-focussed sectors are more inflation proxies and that is where we are likely to see a good amount of allocation happening over the next two years and those are the sectors which can do very well,” says Naveen Kulkarni, CIO, Axis Securities.
How would you maintain your positive stance on India? Your target is 20,200. After the recent correction, it provides a decent upside?
Yes clearly so if we look at the Indian growth prospects, which continue to be very, very strong and even post the inflationary pressures that we are seeing on account of the global commodities going up, crude going up. Overall we believe the earnings variability is not very high. Even our estimates are reasonably conservative and next two years’ earnings would still be very strong. From that perspective, our target of around 20,000 for Nifty by December continues to hold and that provides a good upside from current levels.
But you also talk about the fact that sector churn is really the key. Which are the sectors you think will underperform this year and which are the ones you expect to outperform?
From an overall construct perspective, we are more positive on B2B themes vis-a-vis B2C themes. Also, we are looking at more value-focussed plays. Those are the areas which will outperform. Overall, commodity as a space will continue to do well. Metals, mining are areas which will do well. Even agri commodities will do well. So sectors like sugar, some of the agri commodities will do well for the year.
Thereafter, with a lag, banking can continue to do very well for the year. Interest rates, of course, going up will add to the cost of funds but what is also going to happen is that that demand for working capital is going to go up and so the nominal growth rate will look reasonably strong. The spreads or the net interest margins can continue to look good.
Moreover, at least the top tier banks are very well placed in terms of their book quality. So from that perspective, earnings growth even for the banks is going to be very strong. These are some of the areas which will do well. We are going to witness challenges in sectors like automobiles. Of course, there will be challenges there. Large ticket consumer discretionary consumption can be an area of challenge because there could be demand challenges and also raw material costs are going to be a challenge. Of course, if one can be a little more focussed in terms of what they pick, there is still scope to make a good amount of money in the markets this year.
How is it shifting from high PE sector like FMCG and looking at low price to book values or low PE names across sectors?
Typically what we have observed is that in a scenario where interest rates tend to go up, the value focussed themes tend to do well compared to growth. So in a scenario where interest rates are going down, we are likely to see growth themes doing much much better because typically in growth themes, the earnings tend to be back ended, the PE multiples are high and so the PE multiples will continue to hold or can even expand.
But we are in a scenario where the interest rate is likely to go up. In the next three years, US interest rates might be closer to 4% and in that kind of a scenario, the PE multiples are likely to contract and value themes are likely to do well – sectors which have a lower PE.
Moreover, we are also seeing inflation as a big theme. Value-focussed sectors are more inflation proxies and that is where we are likely to see a good amount of allocation happening over the next two years and those are the sectors which can do very very well.
I am looking at your top picks and I am intrigued by the names like Bajaj Auto, Maruti Suzuki. You have a couple of other auto names as well; Ashok Leyland is also in your top picks. What makes you so bullish about autos when the sectors facing a lot of headwinds?
Again these are some of the themes which I would say are more of the bottom of things. Bajaj Auto is of course a low PE stock compared to most of the other sectors that is point number one. It has got a higher dividend yield more importantly it is an export focussed play which is essentially going to do well because of higher oil prices right. So, that is the theme that we are looking at.
More so, three-wheeler demand is going to be influenced by schools opening up this year. Bajaj Auto is a play which is more focussed on what is happening internally. Second, our themes are more focussed on these areas where there is a good amount of pick up which can happen in the next one to two years kind of a perspective. Bajaj Auto makes the cut, Ashok Leyland is more of a CV cycle play. In the case of Maruti. we are going to get an equally strong product cycle.
Maruti has been an underperformer for the last four years. I think the product cycle is going to improve this year and that is where we are a little more positive. Overall, we are not very positive on the automobile sector but if there are stocks which are beaten down, which are reasonably valued at current levels, which are I would say that at much lower multiples compared to their historical averages, it makes sense to look at these names as there is good chance of value being created.
What do you make of this recent surge in commodity prices? What would that mean as far as raw material impact is concerned for companies that are heavy on packaging?
Overall commodities as a play will continue to be high because there are going to be a lot of supply side issues emerging. I do not see them cooling off. The only question is to what level they will rise and what level they will cool off. That is the most critical aspect. I feel that commodity prices are already very high. From a company perspective, if these prices sustain, the profit that these companies will make will be phenomenonal but will they continue to rise from these levels substantially?
I believe that more or less a consolidation in this kind of a zone seems quite likely. What happens to packaging companies and other areas? Most of the companies tend to be pass through higher costs. Initially there will be working capital challenges which they will have to manage. The next three months are going to be very tough but once things stabilise, these companies will come back to their normalcy. A three-month period is where it is going to be a challenge and where a lot of supply side issues will be there but post those three months, things will look much more normal and we should start seeing things stabilise for even the packaging companies also.