Large IT companies are priced to perfection

The worst is not over for all NBFC stocks and it’s the time when men will be separated from boys. RBI has ensured that liquidity remains comfortable at the system level, while SBI has expressed its intention to increase loan portfolio purchases from them, said VK Sharma, head (PCG & capital markets strategy), HDFC Securities, in an interview with Ravi Ranjan Prasad. PSBs that are facing difficulties in maintaining required capital level will be cautious while helping NBFCs, Sharma said. Excerpts:

Has the equity market corrected enough to see some stability?

The market is in a fluid state with a lot of moving parts. A plethora of factors like rising interest rates in the US and accelerating trade wars are impacting the emerging market currencies. Surge in crude prices is adversely impacting India’s fiscal and trade deficits and therefore the rupee.

The market doesn’t seem to have fully discounted the developments as yet. It continues to be a developing story. More money definitely needs to be put in the market, but it’s necessary to space investments out.

Why domestic institutions could not put a strong front to foreign portfolio investors' selling during the October mayhem?

The domestic mutual funds and insurance companies could not absorb the sales of FIIs. But the situation would have been much worse without the domestic money. The domestic inflow is increasing every year. Since 2015, the domestic institutions have been large buyers of equity than FIIs. This year, they have been net sellers of Rs 33,340 crore. As a result the Nifty is down 2.5 per cent for the calendar year. In 10 months of 2008, FIIs selling (Rs 51,000 crore) had erased 63 per cent of the Nifty from 6,138 to 2,258.

Was monsoon also a factor along with weaker rupee and high crude oil price in putting pressure on the market?

IMD had forecast a normal monsoon. But the monsoon season that ended on September 30 saw a 9.4 per cent rain deficit. 2018 is the fifth consecutive year to register deficit rains. East and northeast India face a worst deficit this year compared with other regions with 24 per cent deficit. But the storage level in tanks and reservoirs is higher at 74 per cent, which augurs well for the rabi crop. The 10-year rain average is 70 per cent.

Has the first set of corporate results met the street's expectations? Blue chip IT stocks were trading at all-time highs before the Q2 results. Will they sustain high prices they are commanding?

Large IT companies are priced to perfection. Both TCS and Infosys have been able to meet the market’s expectations. For IT companies that are yet to announce results, we need to see whether their numbers and guidance are as per the market expectations. If they don’t deliver, stocks will react on the downside. For example, Mindtree, which announced softer results, was hammered 15 per cent on Friday. Auto firms expected to report decline in PAT on a strong base last year. Timing difference in the festive season is expected to have influenced volume growth momentum in Q2. They are impacted by high commodity costs, a weak rupee and heightened competitive intensity in two-wheelers.

Consumer sector stocks are expected to deliver decent growth in profits. The entire consumer universe is expected to report a strong set of numbers. Metals universe is likely to post another quarter of strong performance, especially steel stocks. Telecom stocks are expected to report a loss. Private banks are expected to report flat PAT growth. PSU banks are expected to report decent profits.

Oil marketing companies’ stocks were in for big correction. Are these stocks worth buying?

Oil marketing companies present a good opportunity for investors. But one should not keep them for the very long term as these have capex plans, which may weigh on the sector. We don’t like the upstream oil companies, as there is always a risk of burden sharing on them if the crude prices rise. If the crude prices are down, then anyway, OMCs are better. Gas distribution companies on the other hand are better picks as they have the ability to grow and earn irrespective of prices.

NBFCs have seen sharp correction after IL&FS downgrade and liquidity drying out. Is the worst over with PSBs coming forward to buy their short-term loan assets?

No. The worst is not over for all NBFC stocks. It is time where men will be separated from boys. RBI has ensured that liquidity remains comfortable at the system level, while SBI has expressed its intention to increase loan portfolio purchases from them. For PSBs facing difficulties in maintaining required capital level, they will be cautious while helping NBFCs.

Mutual fund exposure to NBFC debt at 30 per cent of their debt AUM is outsized and unlikely to sustain. Large upcoming maturities in the next two months will be a challenge given that many NBFCs have mutual funds contributing 25-40 per cent of their borrowings.

Weak and marginal players will have to recalibrate business models whereas NBFCs with sound asset liability matching business model will have to follow a more stable growth model with risk-based pricing approach. Large and quality NBFCs will get liquidity but price will increase across the board. NIMs will witness some pressure for all NBFCs.

Will assembly poll outcomes impact the equity market?

Though the outcome of state elections does not have a direct bearing on the Lok Sabha elections. But coming just before the general elections, surprise outcomes could make an impact.

The outcome of general elections has no impact beyond six months. The demographics of India are favourable and they will continue to be so.

Buyers have returned to mid- and small-caps stocks after a long and continuous decline. Is it sustainable or we would see more correction based on their valuations?

The mid- and small-caps have fared much worse than the large-caps. As compared with the Nifty’s fall of 2.5 per cent for the year, the mid-cap index has fallen 24 per cent and the small-cap 32 per cent. The mid- and small-caps will also fall if the benchmark indices go down but they would provide more value to investors. Value-seeking investors will pick mid- and small-caps more than large-caps if they fall equally from here.

raviranjan@mydigitalfc.com