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This will be a year where pharma outperforms: Jimeet Modi

"All the pessimism with respect to demonetisation, Trump on emerging markets – all the negatives have been broadly covered and discounted by the markets," said Modi.

, ET Bureau|
Updated: Jan 16, 2017, 08.39 AM IST
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"This quarter will be a wash-out and to some extent to the next one as well," added Modi.
"This quarter will be a wash-out and to some extent to the next one as well," added Modi.
Jimeet Modi, CEO of Samco Securities feels Pharma will be a key sector to watch in the coming year but is not bullish on IT stocks despite low valuations, he foresees structural shifts in the sector. Excerpts from the chat:

What is your market outlook for 2017? Will it be a subdued year?
Our view is that it is not likely to be a subdued year; it will be a trend year. In the past three years we’ve gone nowhere. It’s hard to give specific targets on the Nifty but in FY 18 we should be able to make a new high on the Nifty.

How do you see the market panning out before the budget? Will it fall?
All the pessimism with respect to demonetization, Trump on emerging markets – all the negatives have been broadly covered and discounted by the markets. We had seen a pretty steep correction all the way down to 7900. The market did find support and has seen a good V shaped recovery. We believe it is the beginning of a major bull market rally. The best bull markets start when the sentiment is very poor. What will give an awesome kicker to the bull market would be earnings growth which we believe will start coming in the second quarter of this calendar year, probably by third or fourth quarter.

What is your view on the earnings outlook in the coming weeks?
This quarter will be a wash-out and to some extent to the next one as well. This is a situation no analysts have seen in his life, he doesn’t know what’s going to happen to earnings. Actually I would absolutely discard any analyst estimate for this quarter. Three to four years down the line, this quarter would be remembered as the demonetization quarter. Markets doesn’t value one-offs too much, it values granularity of earnings which I think will come back from Q3.

If there are any companies which end up reporting good numbers despite demonetization those will actually receive a much higher premium.

We largely believe Housing Finance Companies will not do that badly and neither will consumer finance companies, like Bajaj Finance. The domestic financial services and perhaps telecom expect a minor slowdown in revenue will not see major downgrade will not look too bad. FMCG and consumer discretionary sectors the impact is quite unknown, also because of sheer size of the sector – Rs 40 billion, even if there is a 1% slowdown at an end company level the impact is pretty hard.

What about the export oriented sectors like IT and Pharma sectors which are facing some headwinds of their own?
We believe this will be a year where Pharma outperforms the rest of the indices. The good thing about these two sectors is they will probably not show earnings contraction like the rest of the domestic businesses. IT we are not too bullish even though valuations are very compelling. This is because there is a structural shift in the industry, to AI and IOT which will see growth in the next 10-15 years. Product IT companies is going to do far better than service based ones. In India the bigger companies are all service based. If IT is not able to get its act together, many of these companies may become redundant.

Any expectations that you have from the budget?
This is going to be a taxpayer’s budget. The government may handsomely reward any and everyone in the tax net. While increasing the tax base he may try to reduce the incidence of tax on people who are already honestly paying taxes. So more money in the hands of people which would drive consumption.Roads, railways will receive a thrust as well.

From the markets perspective, though a long term capital gains tax may not come, we believe the period of holding would change from one to two years.

The slowdown in growth in Q3 was because of a policy action, demonetization and the kicker in growth would also come from a policy action like the budget. That’s the real expectation.

Any names among the private sector banks that you find particularly exciting?
Our preferred names are Kotak Bank, HDFC Bank and Indusind Bank, both from a quality and valuation perspective I think a basket of these three will do good in the next few years.

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