Going forward, consensus earnings growth expectations are at over 20 percent for FY19 as compared to the sub-10 percent growth witnessed in FY18.
With corporate earnings witnessing traction, the current market valuation multiples should broadly sustain, Jayant Manglik, President, Religare Broking told Moneycontrol’s Sunil Shankar Matkar in an interview. He also said that good monsoon will be one of the factors that will support growth and that new highs could be made in the second half of 2018.
Edited excerpts:
The market has been highly volatile due to the movement in crude oil prices and rupee. Do you expect it to remain range bound or it could cross previous highs by second half of 2018?
We believe that the upward movement of crude oil prices could increasingly face challenges on the back of continued rise in US oil production and the recent measures by Saudi Arabia and Russia to counter potential shortfalls in oil supply. This will put a reign on the depreciating rupee also. Further, with corporate earnings witnessing traction, as evident from the March quarter earnings season, the current market valuation multiples should broadly sustain. Also, we believe a good monsoon will be one of the factors that will support growth. In wake of these factors, we do believe that new highs could be made in the second half of 2018.
How do you read March quarter earnings season? Some experts say the worst may be over for earnings and recovery should start from current year. Do you think FY19 will see revival in earnings or is there a chance of downgrade in earnings?
Q4FY18 results have been a mixed bag, depending upon the sector which is being considered. However, on an aggregate basis, the results season has been largely in-line with expectations on the revenue front. On the Net profit front, it was largely the provisioning by PSU Banks, which impacted the overall profitability. On the margins front, while sectors like Autos witnessed some pressure on account of the higher raw material prices with global metal prices being firm, FMCG companies largely managed to improve their margins.
Going forward, consensus earnings growth expectations are at over 20 percent for FY19 compared to the sub-10 percent growth witnessed in FY18. While we remain optimistic of earnings growth gaining further traction, we do believe that some downgrade to FY19 earnings is possible. However, notwithstanding the limited adjustments on this front, we do not expect this factor to be the only deciding factor for the market.
Will FY19 turn out to be a year of largecaps more than midcaps & smallcaps in terms of returns?
The recent correction in the mid-caps and small-caps space, which has been triggered partly because of the SEBI re-allocation dictum for Mutual Funds, has brought many quality companies back in the valuation comfort zone. Also, considering that over the past decade, the Mid-cap and Small-caps indices have outperformed the Nifty most of the times on a calendar year basis, the probability of generating higher returns over a period of time is also greater. However, investors must bear in mind the higher risks and volatility associated with investing in this space.
Crude has dipped sharply from 3-1/2-year highs of $80.50 a barrel touched recently. Where do you see crude prices heading?
Recent volatility in oil prices can be justified by simple economics of demand and supply. Prices rallied sharply due to supply disruption from Venezuela and Iran over concerns of renewed sanctions by the US. However, prices eased by around 8 percent from their recent highs, when Saudi Arabia and Russia discussed raising OPEC and non-OPEC oil production by 1 million barrels per day (bpd) to counter potential supply shortfalls. Though some minor rebounds cannot be ruled out, but we expect prices to head lower closer to the $70/barrel mark. The void in supply is filled by the oil giants which will cater to the near term demand, keeping a check on oil prices.
Do you see inflationary pressures due to higher crude oil prices and can retail inflation cross 6 percent in May or June?
We expect the retail inflation prints to be considerably higher for May and June not just on account of the higher crude oil prices but also because of the very low base effect of May and June last year.
Do you expect a hawkish stance from the RBI in June policy. Do you see any rate hike in FY19?
In wake of the expected rise in retail inflationary pressures on account of the rise in global crude oil prices coupled with the depreciation in the rupee and also the impending higher minimum support prices, we do believe that the RBI would become relatively hawkish, which will be reflected in a probable change in its policy stance too to begin with.
Almost all PSU banks reported losses in Q4 on higher provisions following new norms by RBI. Do you think the worst is over for PSU banks and FY19 would be a year of stability in earnings or there is more to come?
A: We believe that the worse could be over for PSU banks in terms of NPA provisioning. However, the provisions over the past quarters have eroded the capital of PSU banks, which will continue to impact their lending ability. The PSU banks losing market share can be partly attributed to this, a trend which we expect to continue in the foreseeable future. Going forward, we believe additional recap by the government and/or faster resolution of NCLT cases would help rebuild PSU banks’ balance sheets. However, for now, we would remain cautious and await clarity on these fronts.
Could you list out five stocks to bet on if monsoons turn out to be as good as expected this year?
Swaraj Engines: Buy | Target – Rs 2,426 | Return – 24%
Swaraj Engines (SEL) is engaged in manufacturing of engines for fitment into M&M’s “Swaraj” tractors. It derives ~97 percent revenues from sale of tractor engines. The domestic tractor industry has witnessed a significant turnaround over the past two years, helped by two successive years of normal monsoon. This is well reflected in SEL’s strong financial performance in FY17 & FY18. Going forward, in its initial forecast, IMD has predicted normal monsoon in 2018 as well. This would keep the demand for tractors buoyant and result in healthy volume offtake for SEL. We expect SEL’s net revenue and PAT to grow by 15 percent & 16 percent CAGR over FY18-20E, likely to be driven by good monsoon & new launches.
Symphony: Buy | Target – Rs 1,965 | Return – 28%
Symphony holds leadership position in organized Air Coolers market, commanding market share of >50 percent. Good monsoon would certainly increase the spending power of consumers, especially in the semi-urban and rural areas, Symphony’s key markets. This would result in improved demand for air coolers and boost the company’s volume growth. GST implementation will help the company to strengthen its market share further in the coming years. We expect healthy growth momentum in revenue and profits to continue over the next 2-3 years. New product launches in premium category and operating leverage should provide cushion to margins. We remain positive on the company considering its market leadership, cash rich and debt free status, superior return ratios and high dividend payouts.
Nilkamal: Buy | Target – Rs 2,231 | Return – 31%
Nilkamal holds leadership position in Material Handling and Moulded furniture segments, which are key revenue & profit growth drivers for the company. The growth in these segments is largely linked to the macro revival and improved consumption. Good monsoon would boost the consumer spending and propel the demand for company’s products across its segments ‘plastics and retail (@home)’. We estimate Nilkamal’s consolidated revenue and PAT to grow by 10 percent & 19 percent CAGR over FY18-20E. Operating leverage and some stability in the crude oil prices should result in gradual uptick in margins.
Supreme Industries: Buy | Target – Rs 1,473 | Return – 15%
Supreme Industries (SIL) holds leadership position in the organized domestic plastic piping market and is the second largest player in moulded plastic furniture. Further, it has a strong presence across other segments of plastics like packaging products and industrial products. We expect the company to be a beneficiary of good monsoon as it would drive the consumer spending. We expect SIL’s consolidated revenue to grow by ~14 percent CAGR over the next 2-3 years, led by demand revival, steady capacity additions and enhanced product offerings. GST transition would clearly yield benefits over the medium-to-long-term.
Prabhat Dairy: Buy | Target – Rs 230 | Return – 30%
Prabhat Dairy (PDL) is an integrated milk and dairy products company, catering to both institutional (B2B) as well as retail (B2C) customers. The company’s growth prospects look bright, given the robust outlook of dairy sector, PDL’s plan to grow its business into new segments, product innovation in consumer business and strengthening distribution reach across India. Good monsoon would result in better productivity yield and boost the company’s volume growth and improve its margins trajectory. We expect PDL’s net revenue & PAT to grow by 13.5 percent & 18.6 percent CAGR over FY18-FY20E. With the company’s plans to reduce debt and improve working capital cycle, we expect a marked improvement in its return ratios also.
