Institutional investors need reassurance on governance, says Jigar Shah

Jigar Shah, chief executive officer at Maybank Kim Eng Securities
The markets will now react to the June-quarter earnings of India Inc, besides global cues, over the next few weeks. Jigar Shah, chief executive officer at Maybank Kim Eng Securities, tells Puneet Wadhwa that as a base case, his six- to nine-month Nifty50 target is 10,500. The market, he says, will present more bottom-up opportunities this year and a broad-based rally seems difficult. Edited excerpts:

What are your expectations from the June-quarter results? Your earnings growth estimates for the Nifty in FY20?

Consensus earnings growth for Nifty stocks is in the high twenties for FY20. This is partly due to the base and partly some one-offs going away. However, it appears that the same may happen with a skew towards the second half of FY20. 

Where do you see the Sensex/Nifty by the end of December?

Our six- to nine-month Nifty50 target is 10,500 as a base case. The market will present more bottom-up opportunities this year and a broad-based rally seems difficult. The catalyst for the market will be better-than-expected pick up in the economy, recovery in private capex, continued soft interest rates and stronger liquidity. The risk will be a decline in global markets and flows. 

What’s your view on the consumption-related sectors?

The recent data and estimates provided by Nielsen and also in the past two quarters in the GDP print confirm a slowdown. However, it remains a key category in India and should look up going ahead as sentiment on economic growth, investments and jobs improves. If the monsoon deficit is largely met in the next two months, it will be another trigger. 

Is it a good time to look at defensive bets like information technology (IT) and pharmaceuticals from a 6–12-month perspective? 

We see opportunities on a bottom-up basis across sectors. It would make sense to look at good businesses which have bottomed, or are bottoming out, on valuation and have reasonable medium-term growth prospects. This includes cement, private banks and financiers, city gas distribution, software, logistics, automobiles and media. We are not particularly recommending to find a haven in information technology (IT) and pharma. 

Which sectors have you been overweight and underweight on thus far in CY19?

We would remain overweight on private banks/financiers, software, consumer and cement among the major sectors. On telecom, we are turning neutral versus having a negative stance earlier. We remain negative on state-owned banks. 

How are foreign investors viewing India as an investment destination within the emerging markets?

Foreigners are still positive going by the year-to-date (YTD) flows. India remains an important long-term investment avenue. Top concerns are acceleration in bank non-performing loan (NPL) resolution, a revival of private capex, bold reforms for privatisation, and above all, reviving growth and building very positive sentiment in the capital markets. Institutional investors need reassurance on governance in India, which seems to be somewhat broken since the bursting of the IL&FS scandal. 

What’s your view on the new public float proposal for companies?

The detailed guidelines on this are still awaited. It is important not to overcrowd the market in the near term while giving companies enough time to achieve this. The idea has merit, but the execution needs to be careful and calibrated.

Has the government set itself an unachievable disinvestment target in this Budget?

It is achievable depending on market sentiment and flows. If investors can make money due to reasonable pricing, it can be achieved. The negative is that a lot of the past initial public offerings (IPOs)/ follow-on public offerings (FPOs) haven't returned as well due to a variety of factors.

How should investors approach infrastructure as a theme from a long-term standpoint? 

Organised real estate companies are the beneficiaries of the crackdown on bad practices in the industry following demonetisation, and the implementation of goods and services tax (GST) and the Real Estate (Regulation and Development) Act, 2016, also known as RERA. The demand is shifting towards organised players. Affordable housing is another bright spot along with real estate investment trusts (REIT). There are, however, still challenges in terms of adequate financing and high inventories. Investors should take their bets through proxies such as cement, paints, buildings material and niche housing finance companies (HFCs). 

Has the Budget done enough for the financial sector? 

Yes, banks/financiers with good capital base and risk management track record are well placed. A lot of the things, especially for non-banking financial companies (NBFC), could happen outside the Budget and, in general, liquidity should improve but not for all. The Reserve Bank of India is supporting, but the fungibility has to be the primary responsibility of the companies, which is a direct result of their governance.

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