After this week’s turbulence, is the market giving good entry points now or should one still wait it out?
After a parabolic move where the index has doubled from the bottom that we saw in March of 2020,a 6%-7% correction is not even par for the course. A 10-15% correction is probably something one should anticipate in any kind of equity market. The structural bull market of 2003-2007 saw 20-25% corrections. So 7% correction is hardly anything but the runup means that a lot of good news is priced in. The earnings are going to jump up by almost 35%-45% in FY20 and the index level is broadly priced in.
The fact that FII flows are coming off is a bit of a concern because I would say that incremental catalysts on the flow side are probably missing at this point in time. A stimulus in the US is on the cards and one can’t see whether it is going to go through or not. Also, one needs to see if President Biden is going to raise taxes on corporates.
We are going to see a very volatile 2021 and within that, I see value in certain pockets, very specific stocks within sectors. So I would still bet on some private banks like ICICI Bank and maybe HDFC Bank though they have risen quite a bit. The life insurance space still looks very interesting in terms of
. The pharma pocket looks interesting as do very selective IT stocks. Broadly that is the kind of pitch we are giving to clients. I do not think one should be expecting a whole lot from a returns perspective. I would think 14,000 as a pivot plus minus 10% is what the market would gyrate on.
What would be a good Budget according to the market and what will be a bad Budget?
I do not think people are giving too much weight to the Budget, which is one of the factors that is going to be driving the market up or down. The US picture, the domestic earnings picture is far more important. If it does not spoil the earnings picture, I would say it is a good Budget and also if it delivers a fiscal deficit between 5% and 6%. If it is more than 6%, I would say it is going to be expansionary and is going to lead to slightly higher inflation. If it is below 5%, then I would probably think that the market is going to get worried whether there is a pull back in spending that the government is going to do which is going to hurt growth.
A 5-6% fiscal deficit range is something that one is going to watch out for with a 15% nominal GDP growth and probably taxation growing by like high teens or thereabout. My sense is we are probably getting into an earnings-and-a-Budget math territory which we saw between 2003 and 2007. We are going to see very strong growth from here on on the earnings side. That will flow through into the taxation numbers that the government is going to see.
If you look back in history, Chidambaram actually delivered a few Budgets which saw taxation numbers being even higher than the budgeted numbers. I specifically talk about FY07 and FY08 numbers which were phenomenal from a taxation perspective. We may be getting into that territory. We have been fixated on earnings growth number not being met. Maybe we need to shift away from that and start looking at a situation where earnings are going to surprise you on the upside from here on. They are going to be more broad-based as a lot more sectors are going to be participating. Banks are going to participate. The metal sector is going to participate. The infrastructure sector is probably going to participate some time down the road. So it is going to be more broad-based and we are going to see healthy earnings growth.
What is your view on IndiGo and are you looking at travel optimistically?
We do not cover the airlines sector and so will not be able to comment on IndiGo specifically. Outside of airlines, the discretionary space has been impacted significantly by Covid. In that, we are pretty bullish on the film exhibition side so that is opening up. Occupancy levels are fairly low but structurally we are fairly bullish on the film exhibition space because we believe that this is a consolidated sector and Inox and PVR should deliver a longer term basis a revenue growth of mid teens and earnings CAGR which could be slightly north of that.
The valuations right now do not factor in the positivity from a medium term perspective. There is a fair bit of concern regarding the business in the very immediate term and that is affecting the prices. That should get alleviated once vaccinations are done.
What about some of the auto names? Within the segment, is there is particular theme that you are focussing on?
We are quite bullish on auto. I would probably go stock wise there. The common theme would be rural incomes staying up reasonably strong.
The other theme would be downtrading, in the sense that as prices of the end products have gone up by 25-30%, there is a potential for them to rise even further. As the budgets or wallets are limited, people are moving down the price chain and buying entry level bikes or cars which are going to help out a player like Maruti and
. Those are the two stocks that we like in the large cap auto space and they have shown 15-20% upside from a one-year basis.