Expect 15% return on Nifty and 30-40% on select mid and smallcaps in CY19: Sanjay Dutt, Quantum Securities
In case of extreme volatility, you get levels which are always good to both enter and exit, says Dutt.
Will 2019 be a happy year in terms of returns?
Absolutely, I have no doubts about that. I have complete conviction that this year is going to be a good year for most of the emerging markets and India is going to stand out in the emerging market universe. My hypothesis is not based on domestic events or domestic fundamentals. A lot of other things are going to be positive tailwinds there also but it is more an emerging market trade that is going to be functioning right across this year.
We are going to see developed markets correcting, plateauing and a good amount of money starting to move towards the emerging markets. What convinces me more is what we heard from the US Fed Chairman Jerome Powell yesterday. He is not that hawkish in the sense that he has sent a clear message to the markets that there may not be any rate hikes this year. That is going to be a positive event for liquidity and valuations across markets, particularly India, are now much more reasonable compared to what they were in 2018.
Most people are also saying that 2019 is going to be a market of two halves; first six months may be impacted by election dynamics and in the second half of 2019, it is going to be a completely different equity landscape altogether. Do you not believe that the first half is going to be a very trying time?
Yes, of course, volatility is something we will have to live with but that is more of a friend of an investor and an opportunist rather than being something to worry about.
If you have got your conviction ideas in place and you have your disciplined levels of entering positions in place particularly investment positions, volatility normally turns out to be your friend. In case of extreme volatility, you get extreme levels which are always good to both enter and exit.
So there will be volatility in the first half particularly because of the general elections. But at the same time, we have a floor on prices and because of that valuations are reasonable.
If they fall anymore, quite a few stocks will get compelling. Leave aside the Nifty because it is skewed towards many stocks, across-the-board, you will find lots of attractive stocks to buy, if they fall another 10-20% because of some other events.
Per se, an election year has not been bad for the markets historically. Is it going to be a similar case that despite volatility in the first half, you could see a catch up led by global cues and local factors into the second half of the year? Also, what would be the returns?
On an absolute basis, one can expect 15% return on Nifty you from the current levels. But if you start looking at individual opportunities in both large caps and a good number of midcaps and smallcaps, if you have got your conviction buys and have done your homework, you can target 30-40% in many stocks.
I have been repeatedly saying that after this aggressive correction, beginning September mid to about mid December, when things have stabilised a bit, we will have a large number of good quality stocks correcting 30-50% in the midcap and smallcap universe.
For them to bounce back and give an absolute return of 30-40% from the current levels is quite possible. Yes, you will have volatility, you may have them going down occasionally 10% more because of some other events that are not relevant to the companies in particular. But yes, to cut a long story short, on an index basis, 15% can be expected and on specific portfolios and specific stocks, 30-40% can easily be made in this market this calendar year.
In order to befriend this volatility, what should be the right tactical approach for one’s portfolio?
It is going to be a mix. Look at some contrarian plays, ones that have not performed in the last two years but are starting to sort out their problems.
Good quality, top three, four PSU banks have more or less provided for all their NPAs and are catering to corporate borrowers. SBI, BoB and Canara Bank look good to me. These are some contrarian plays to look at. Within consumption, there are companies like Dabur, Marico which would give returns. It is a kind of a mixed basket that one would have to look at.
Obviously it goes without saying that in most of these companies, I have a vested interest. I would be invested in it or would have recommended to my clients. Some specific theme is unlikely to play out big time in 2019. There will be pockets of huge opportunity because of this volatility and you just need to identify your stocks and buy them at right levels.
I do not get scared if they fall 10-15% because in markets like ours as well as in western markets, stocks can correct 30-40% and then again bounce back and give you that expected return over three, five years is quite normal now.
It is interesting that you are talking about PSBs at a time when everyone seems to be rushing to buy ICICI and Axis Bank. But within PSBs, would you stick to the SBIs of the world or is it a more bottom up approach within PSBs that you are adopting?
It includes SBI and the rest would be bottom up. I mentioned a few names which are well positioned now. In particular, I have three names which I am sure will do well this year since they are good banks with a very large, good customer base, have cleaned up pretty well and have compelling valuations. These would be BoB, Canara and PNB. All three have the potential of giving good returns from current levels in this year.
TCS results are out. What did you pick out of those earnings and how do you see the earnings trajectory move from here? Do you get a sense that FY19 would pave the way for stronger earnings profile which would give 15% return on the index?
I am glad you raised up the issue because even there I have got that wrong for the last few quarters because I was expecting an uptick much earlier than what we are now projecting. But I think that the first half of FY20 would actually show us very robust earnings. Earnings this December as well as March quarters maybe patchy in some pockets here and there.
But June onwards, things will start looking much better because a lot of political uncertainty is out of the way and more than that, some of the work that the government has fanned out over the last year and year and a half in a lot of sectors, is actually going to start showing up in company bottom lines towards FY20.
The earning uptick in FY20 is surely going to be there. My estimate and my projection is that as early as first half of FY20, we will see a very good earnings uptick and robust numbers coming in. Analysts will start reworking their projections.
Another important thing that I am basing my hypothesis on is because since real interest rates in India are very high at this point of time, with the change in RBI leadership, a new look would be taken to interest rates, liquidity, etc, of which you are already seeing the first signs in liquidity.
I expect this year to see much better, more dovish monetary policy and much more dovish stand both in terms of liquidity as well as interest rates from the Reserve Bank of India.
Capital formation, capital investment in the private sector will start looking up and that is going to happen in the second half of the financial year.
Would you believe that the best is behind us in the IT sector? The A listers have already made you 35 -40 odd per cent per piece?
Calendar year 19 is not going to be the year for technology outperformance, but you cannot ignore the sector. You would want to have it on your portfolio. In my personal portfolio level, I would be underweight IT for the next 12 to 18 months. It has played out as a pretty good defensive and another reason to base my hypothesis on is I do not think they will have the currency tailwinds anymore because I see a weaker dollar going ahead.
If we see a weaker dollar, it obviously means that the benefit of the estimates of 74-75 really would not fall in place this time for INR-dollar. If that is the case, the IT tailwinds, because the currency will not be there over the next year and a half or so.
Month after month, you are seeing auto sales numbers decline. Eicher is available at sub-20,000 now. Maruti has fallen off significantly from its peak and the same can be said across two-wheelers and commercial vehicles too. Is this an opportunity to buy into any of these names or would you wait for the first signs of a revival first?
I would wait it out because products, sectors, companies all run through a real lifecycle, a curve which takes us back and forth, up and down. In the automobile sector, we are now at some kind of real radical change that is going to pan out. It is that change which the sector both in terms of the producers and consumers are adjusting to, whether it is talk on electrical vehicles or move to other technologies.
We are seeing adjustments on those levels and we cannot expect auto numbers to improve continuously. For the last probably 10-20 quarters, the numbers have improved. At some level, sectors and industries slow down. That is the phase that we are going through over the last few quarters and particularly last two quarters.
This is going to play out over the next few more quarters in my opinion. I may be wrong but my assessment is that there is not too much of an upside left in any of the larger auto companies right now to really to take aggressive bets on your portfolio. You may have an allocation to it but at the same time I do not think I would be overweight or have substantial positions in some of the auto companies both because of product cycle dynamics that I spoke about and also because today we are running into major technology changes and industry and consumers are adjusting to new trends. This phase has to play out and before any clarity emerges.
Reliance is not so much a refinery now but retail as well as Rel Jio and everybody is pegging their hopes on the value unlocking story in Reliance. Is that what you are seeing as RIL story from here?
Absolutely. Reliance is going to lead the markets in the next two years. There is phenomenal unlocking potential there. The businesses there have now started to mature particularly in the Jio telecom business, have started to stabilise. We are seeing numbers kicking in. There are questions on revenue and profitability but the size and the whole industry dynamics have to be considered as well.
It is a matter of time when there will be huge unlocking opportunities in Reliance, in both retail and Jio. It is a matter of time whether it happens within this calendar year or this financial year or the next one.
I have been very optimistic about Reliance for the last year, year and a half and I am glad I have got it right. Even now if someone invests in it and stays invested for two-three years, he can actually beat the market returns by a huge margin. Reliance is going to take leadership in the Indian equity markets at least.