Illustration: Binay Sinha
Initially, it was Industrialisation, then Globalisation
and now the latest buzz word is PROTECTIONISM.
Leaders of most of the major nations are trying to protect the interests of their own economy including the US, China, India, and Australia, by imposing tariffs/duties on imports, restricting human flows etc to support their own manufacturing and services industries. Recent decisions taken by US President Donald Trump
to increase Visa charges and impose import duties
on steel, aluminum, and other various products from China and other countries are leading to a trade war, which may eventually turn into a currency war. The latest chain of events from the US points to increasing geo-political risk.
Domestically, we are struggling with weaker nationalised banks' balance sheets, series of frauds, stagnant private sector capex cycle, and global trade war.
Historically, the market always reacts negatively whenever a big crisis has taken place -- like the Black Monday Asian crisis
of 1987, Asian financial crisis
in 1997, the global financial crisis in 2008 and now trade-war in 2018. The PNB
fraud may also unfold many more smaller frauds, which could have a very negative impact on credit growth, and the market could see a 5-15 per cent correction from current levels in near term.
However, in the long run, we still hold a very positive view of the Indian economy
and Indian stock market, as earnings growth is quite visible the past two quarters. Nifty
EPS grew in early double-digits as against single-digit growth in previous quarters. Further, various government reforms such as GST, Housing for All, Power 24X7
and Smart City
and robust expenditure plan are leading to economic growth at a faster pace. We have seen massive DII inflows of nearly $17 billion in FY18 till February 2018, compared to FII inflow of just $1 billion. Except for two years in the past 10, FIIs were always net buyers with a cumulative investment of over $200 billion and we remain positive for FY19 as well.
We expect a deeper correction in the near term, so stock selection is the key. We recommend investing in quality companies backed by lower leverage with the domestic-led growth story. We view Maruti
Suzuki, Kotak Mahindra Bank, TCS, Petronet LNG, NBCC
and Bharat Electronics at the current level. However, once the correction is over, we have a very positive outlook on the market and have a target for Nifty
of 13,500-14,000 by 2020.
We don’t foresee any production constraints, going ahead with the capacity additions in Gujarat. However, we do expect some margin pressure in the coming quarters, due to the recent increase in commodity prices. On the positive side, enhanced scale and better product mix would expand margins in the long run. We expect revenue and earnings to grow about 18 per cent and 16 per cent CAGR over FY17-FY20E with RoCE of about 24 per cent.
Kotak Mahindra Bank (Kotak)
Kotak’s digital initiatives led to a strong 50 per cent growth in customer base during the past one year, reaching to about 12 million at end of Q3FY18 versus eight million by FY17. Further, stronger loan growth compared to peers would lead to a gain in market share. With the de-merger of its subsidiaries on the cards, we have a strongly positive view of the bank.
Tata Consultancy Services (TCS)
has managed the MD & CEO transition extremely well. We forecast TCS
to report the best improvement in revenue growth with FY18-20 CAGR at 11.2 per cent YoY (in dollar terms) versus 8.1 per cent in FY18. We expect traction in digital solutions (22.1 per cent of revenue) to continue and forecast a 40 per cent CAGR for the next two years. The stock is trading at 17x FY20E, which is lower than the median one year forward PER of 17.8x.
Petronet LNG (PLNG)
Ninety-five per cent of the company’s capacity is booked under long-term take or pay a contract, which provides strong volume visibility. Also, as the Kochi-Mangalore-Bangalore pipeline is expected to be completed by FY19, PLNG’s Kochi terminal’s capacity utilisation would improve from current 5-10 per cent to 50 per cent in FY20.
With an over Rs 80-billion order book, the company is set for a ramp-up in its execution. We forecast revenue CAGR of 37 per cent over the next two years, way below company guidance. Further, operating leverage can easily translate into net profit growth at 64 per cent CAGR over the next two fiscals.
Bharat Electronics (BEL)
We continue to believe BEL offers good investment opportunities, which would benefit from the “Make in India” thought process of the government and the government’s stress on the defense sector. Order book stood at Rs 405 billion at the end of Q3FY18. BEL is likely to be a key beneficiary of government focus on modernisation and procurement of new capital equipment in the defence sector.
A K Prabhakar is Head-Research and Sudeep Anand is Head-Institutional Equity Research at IDBI Capital
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.