Looking forward
Uncertainties abound, but the new year also gives hopes of double-digit returns for investors

With New Year at the door, analysts are not overly enthusiastic about the equity market’s prospects in 2018. What occupies their mind right now is uncertainties ahead over corporate earnings revival, interest rate hikes from the US Fed, state elections and rising inflation in the new year.

Many believe the year could start with a welcome earnings pick-up in the third quarter, since the ill-effects of botched up GST and demonetisation are fading away. Clarity on this will emerge from mid-January, when the third quarter earnings season begins.

Most probably, Q3 would have built on progress noticed in the second quarter across parameters like revenue, Ebitda margins and profit growth, which indicate a bottom for downgrades and an imminent pick-up in earnings.

But that is not a big consolation for equity investors, since the market has already front loaded corporate profits. This leaves a risk that the market could turn stoic on corporate earnings. No one expects 2018 to beat the current year’s record in market rally. Sensex and Nifty delivered around 25 per cent return in 2017. By all means, the new year would keep up the trend of double-digit returns, but to a lesser extent.

Edelweiss, in its market strategy report, said, “Nifty valuations show room for further market rally. We expect Nifty EPS of FY18 /19/20 to be 500/600/720 and expect it to scale 12,000 in FY19.”

Credit Suisse research analysts Neelkanth Mishra and Prateek Singh view 2018 as a year of greater market volatility. “As the 2019 general elections get closer, state elections are likely to get more market attention. This has limited direct economic impact, particularly after the budget is presented, but changes in market sentiment may drive volatility,” Mishra and Singh said.

“The market as a whole is not expensive on a relative basis, we could still see double-digit EPS growth in FY19. We believe the portfolio weights, though, should differ from those of last year. We are now overweight energy and metals, PSU banks and IT,” the Credit Suisse analysts said.

“Our underweights are high P/E sectors with possible EPS cuts: NBFCs, cement, discretionary and staples,” the said. Getting down to company-specific comments, they said they expect State Bank of India, ONGC, Tata Steel, HCL Technologies and Sun Pharmaceuticals Industries as top out-performers in 2018 while Bajaj Finance, Ultratech Cement, and Dr Reddy's Laboratories may under perform.”

Stock ideas for 2018 from Centrum Wealth included financial services companies like Aditya Birla Capital, Can Fin Homes, ICICI Lombard General Insurance and Manapp­uram Finance. Centrum’s top stock ideas also included textile makers KPR Mill and RSWM, logistics company Navkar Corporation; auto-component maker Rane Brake Lining and software maker Persistent Systems.

Sahil Kapoor, chief market strategist at Edelweiss Investment Research, says growth will be the major market driver in 2018. “Growth acceleration is going to be the key in 2018. Recent fears regarding fiscal slippages seems misplaced as a slight fiscal push may be growth supportive,” Kapur said.

Commenting on the sectors, the Edelweiss report says building materials and housing finance companies are poised to gain from the lower GST rates and multiple favour­able factors supporting housing sector growth.

Holding that the real estate sector is on the verge of a revival, Edelweiss, says the sector’s contribution to GDP will rise to 10 per cent by 2025 from around 7 per cent now.

 

Critical growth drivers for home building materials are India's low per capita consumption of all home building material products, rising GDP, urbanisation and disposable income, nuclear families, shortening renovation cycle, virtually untapped but high potential rural market and the government thrust on affordable housing combined with low interest rates.

Organised players are expected to gain market share from GST implementation and the reduced GST rates, which will narrow the price differential between organised and unorganised sectors, the Edelweiss report said.

Makers of home building materials are expected to benefit for their presence across price points and a higher hold in the faster growing but low competition premium category segments. Home building materials firms in the listed space include plastic pipes & fittings category-- Astral Poly Technik, Finolex Industries and Supreme Industries--in roofing and cement boards & panels---Everest Industries, HIL and Visaka Industries.

In the sanitaryware category are Cera Sanitaryware and HSIL, in tiles are Asian Granito India, Kajaria Ceramics, Somany Ceramics and in the wood-panel category are Century Plyboards, Greenply Industries and Greenlam Industries.

Another company in this sector, Shankara Building Products, seems to be already fully priced and expensive after a huge rally in the stock post its listing this year.

In the pharma space, Bhavesh Gandhi, research analyst at IIFL, recommends smaller healthcare firms as stock ideas, since frontline pharma players, those commanding more than $500 million in US sales, are left beaten and bruised over the past 12-18 months.

"We continue to advice against any exposure to US-centric bets like Sun Pharmaceuticals, Dr Reddy's Laboratories, Lupin, and instead recommend a closer look at a few smaller plays who are either undergoing an API to formulation transition, like Laurus Labs, Strides Shasun and HealthCare Global," Gandhi said.

Sharekhan, in its market outlook for 2018, said, “The US Fed’s comments indicate it is on track to hike rates again in 2018, three rate hike are expected in 2018. Corporate tax rate cut in the US and interest rate hike by the Federal Reserve may lead to volatile flows for markets.”

“Also the Gujarat elections verdict could prompt the government to announce policy measures aimed at providing further relief to the rural sector and trading businesses,” it said.

Sharekhan has identified for investment structural growth themes that could aid investors like Financialisation--household savings moving to financial assets rather than physical assets; Formalisation--shift of market share from unorganised to organised players in fragmented segments; Government expenditure--spending on roads/rail/defence and affordable housing projects and Consumption themes, which has given multi-baggers regularly.

Stephen H. Dover, executive vice president, head of equities at Franklin Templeton Investments and chief investment officer, Templeton Emerging Markets, says India will do relatively well in 2018. In Asia, he expects strong economic growth in China and India to feed through better corporate profits across the region.

“Already, we are seeing many emerging markets trade more on corporate and sector fundamentals than broader macroeconomic trends, something we anticipate should continue in 2018,” Dover said.

But he says, “despite robust global economic growth, we anticipate greater uncertainty in 2018 as central bank policy begins to tighten.”

According to him, disruptive technology companies and consumer focused services companies are expected to perform well, including banking, healthcare and entertainment.

"Global equity markets broadly appear to be pricing in significant earnings growth, but some regions such as Europe and Asian emerging markets were more attractively valued than their US counterparts as of late 2017, making it increasingly important for investors to focus on individual company fundamentals," Dover said.

That’s the biggest hope theme for Indian equity investors in the new year.

raviranjan@mydigitalfc.com

Columnist: 
Ravi Ranjan Prasad