Our Sensex target for March 2018 is 32,200: Citi India's Abhinav Khanna

Abhinav Khanna
Tata Consultancy Services and Infosys began the earnings season for the information technology sector last week. Abhinav Khanna, head of equities at Citi India, tells Puneet Wadhwa that he expects earnings for their coverage universe to fall 12 per cent year-on-year in the June quarter of 2017-18, and also shares views on his sectoral preferences. Edited excerpts:

Your market outlook for the rest of 2017? 

Our Sensex target for March 2018 is 32,200, implying that we are expecting a limited upside from here. There are two key risks, a longer-than-expected disruption from goods and services tax (GST) implementation and a full-year earnings downgrade, on the back of a potentially weak first quarter. On the positive side, a good monsoon and the low base effect of demonetisation (will play out in the second half of calendar year 2017) for some sectors like consumer goods will help.

Are you concerned about valuations at this stage?

The Nifty 50 index is trading at around 19 times the FY18 earnings expectation, while MSCI India is around 18 times. Certainly not cheap, especially when we expect higher chances of earnings downgrades than upgrades. Mid-caps and small-caps across some sectors are more expensive than their large-cap counterparts, with the added risk of lesser liquidity and lower earnings visibility.

Your expectations from the first (June) quarter numbers? 

We expect earnings for our coverage universe to fall 12 per cent year-on-year in the quarter. This is driven by: a) positive base effect in financials and materials wearing off (b) GST-related near-term disruption (c) sector-specific weakness in information technology (IT) and health care, among others. On GST, I feel it is too early to comment on the earnings impact for FY18 and FY19.

Does the ‘India story’ still hold good for foreign investors?

India remains an attractive long-term investment destination, and foreign investors remain significantly overweight (on India). Political stability, solid growth, a stable currency, the fiscal situation and external account being under control, and inflation in check are some reasons. Their key concerns include relatively expensive valuations, risk of earnings downgrades after a potentially weak first quarter, possible disappointment on rate cut expectations and a further delay in investment cycle pick-up. 

 
Which sectors and stocks are you overweight and underweight on?

We are overweight on financials, automobiles and health care (due to hospitals/diagnostics instead of pharma); underweight on IT services and consumer staples.

Your strategy for consumer staples and IT services?

On consumer staples, we are primarily negative due to the very rich valuations. On IT services, there have been disruptive trends at a global level in the past few years and we are fundamentally concerned on both the growth and margin outlook. There is risk of further earnings downgrades in IT.

Are the measures adopted to address the non-performing asset (NPA) issue (at banks) enough?

We remain overweight on the financial sector and feel the Reserve Bank of India (RBI) and the government are largely following the right path on NPA recognition and resolution. We continue to prefer private sector banks over government-owned ones. Housing finance could remain a long-term structural theme, especially on the back on the government’s thrust on affordable housing.

Do you expect more concrete steps to resolve the high debt problem with India Inc?

Any incremental step towards reform is welcome, even if a bit late. Having said that, on corporate debt, the reality is there is a large concentration within a select few names only — India Inc as a whole is in a more healthy shape than a few years earlier.

By when do you see a recovery in the capex cycle?

This might happen only gradually. Initially, the thrust will be more from the government’s side. So, public sector capex is likely to precede private corporate capex. 

Should one stay away from manufacturing-related sectors?

From a strategy perspective, we have an underweight view on metals, though there are some individual stocks that we have a ‘Buy’ on (both in the steel and non-ferrous spaces) from a bottom-up perspective. On capital goods, we are largely ‘neutral’.

Your strategy regarding the realty sector, given the impact of demonetisation, GST and the Real Estate Real Estate (Regulation and Development) Act?

 
On real estate, there are still some headwinds on demand and execution. We like only some selective niche players – it is very specific to the geographies and segment they operate in, and the comfort we have on their balance sheet/cash flows. Within the broad infrastructure space, we are most constructive on cement, where we feel there are demand drivers and good supply discipline, and industry consolidation is an additional trigger.

Is there a case for a cut in interest rates?

On the macro economic front, the two most supporting data points for the India story have been a stable currency and declining inflation; growth numbers need to improve at a faster pace, especially on the investment front. We believe there is a case for a 50 basis point rate cut between now and March 2018.


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