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High inflation print unlikely to dent market sentiment: Hemang Jani

Seeing a strong rebound across midcap and smallcap stocks, says Hemang Jani.

ET Now|
Jan 14, 2020, 12.17 PM IST
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Hemang Jani of Sharekhan says hopes of imminent earnings revival is driving investors to midcaps and smallcaps in the current round of market rally. In an interview with ET NOW, he also listed out his expectations from IndusInd Bank's earnings due later in the day. Edited excerpts:

Inflation, global cues, crude, Iran, lack of earnings, the slowdown in the economy — despite such a long list of negatives, why are midcap stocks coming back?
For the past three to four weeks, we are seeing a strong rebound across the mid- and the smallcap stocks. This could be because there are certain pockets where you might see a bit of an earnings uptick due to a lower base or slightly better environment. Also, certain data points are indicating a revival in a few sectors and people want to explore that. Typically, what happens is that at the beginning of a broader revival people are slightly more skeptical and circumspect about whether earnings will come through or not, but the stock prices tend to move a little ahead of that. It might be the case where over the next two or three-quarters people are expecting a revival in earnings in certain pockets, and particularly from a data point of view where stocks had gone down sharply, the risk-reward might be extremely compelling. Investors are taking a bit of a calculated risk in the midcaps and smallcaps.

How should one play the rally in steel? Is it time now to start buying steel ancillary companies? Will pipe companies benefit too?
I am not clear on how the ancillary story in the steel will play out. But because of the possibility of a price hike and a better global environment, investors are getting positive on steel. However, if that argument furthers to some of the ancillaries is not very clear.

When it comes to the pipes, we have a stock called Astral Poly in our coverage which is not a steel story but we are seeing a bit of growth there. This is a monopoly play in the CPVC segment. This is something that we like. So, we are playing stocks where we see a strong story and clean management.

What are your expectations from IndusInd Bank? Do you think we could see the loan growth moderate this time around?
Yes, that is true. Even if we are expecting a bit of moderation, the loan growth above 20% in the current environment definitely is extremely good, though, from a certain let us say 25% kind of a level it would be lower. But more than the growth numbers, the market is extremely focussed in terms of what really happens to the corporate portfolio and are we really going to see any sort of incremental slippages there? They have about 16% to 17% exposure to the CV sector, so what strategy are they employing to deal with the slowdown in that particular pocket is what people would focus on. Will there be an increase in the credit cost is another parameter that the market would be really keenly watching out for.

Overall, in the current environment, anyone giving a 22-24% kind of growth in the top line and 21-22% pre-operating profit growth, market will take with both hands. These are the two important factors that we should be watching out for.

How are you looking at the overall inflation print? How much of a concern is that for you?
When you look at the CPI data, a large part of that incremental number is coming from the food inflation which is at 14%, and is largely contributed by the onion prices. Now, we have seen that onion prices have cooled down but certain categories like pulses may take some more time to really cool off. But thinking from a different perspective, sometimes people obsess over CPI number or WPI numbers, but despite CPI and WPI numbers being low for the last three years we never had growth. We should not be perturbed by an increase in the WPI because that might suggest we are in for some sort of growth. Let us wait and see how things pan out. I am not focussing too much on the inflation number from a stock market perspective.

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