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Bull run intact, Sensex cheap in book value

Yatheendradas C.k. at 06:00 AM - Jun 18, 2019 ( ) Views: 110

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Bull run intact, Sensex cheap in book value: Ridham Desai
PALAK SHAH  Mumbai | Updated on June 17, 2019  Published on June 17, 2019 BUSINESS LINE

Ridham Desai, Director, Morgan Stanley India, is of the view that the bull-run in stock markets can continue. He says trade tensions are the only major risk for markets now unless there is slippage by India on the fiscal front, which is highly unlikely. Financials and banking stocks are his best bets. Excerpts:
How are foreign investors looking at Indian markets after elections? Any specific sectors that you are bullish on?
Foreign investor mood is looking up for India. Certainty on inflation framework, Aadhaar, direct benefit transfers, and rationalisation of GST are some of the policy measures that will continue and boost consumer spend. Also, in the past 10-12 quarters, revenue growth for corporates has consistently accelerated but earnings growth has been lagging due to lower margins. The last two quarters suggest earnings are turning around. We ended fiscal 2019 with 17 per cent earnings growth for Nifty and Sensex companies, which is the best in eight years.

The financial sector was the culprit on the way down, but it is now taking charge on the way up too. In the next 12 to 24 months, I see financial stocks leading the way up, which is basically banks as their downgrade cycle has peaked, loan growth has picked up and margins are fine. Consumer loans are still growing faster than industrial. In our view, it will be very strong earnings cycle for the next four to five years and we could see 20 per cent compounded growth.

Financial sector stocks is the beginning. The growth will diversify into industrial, consumer and discretionary areas too.

Are market valuations not adequately factored in? Will the NBFC crisis deepen?
We will worry about market valuations when the Sensex crosses four times its book value. For that to happen, the Sensex will have to rise 25 per cent overnight. So, we are comfortable with valuations as of now. The broader markets will do better in the next few months as earnings will turn around.

Nothing of what is happening on NBFCs (debt issues) is a systemic crisis. Government intervention in NBFC crisis is not required because people have taken risk in the normal course of business, which is what businessmen do, and along the way when some investments go bad, you should let them fail. We need large re-capitalisation of state-owned banks. They have deposit franchises but they don’t have the capital to lend. Huge bank re-cap is possible if the Jalan committee recommends transfer of reserves from the RBI to the government.

What could be a risk to the market upside? For the first time, consumption sector witnessed a slowdown...
We should worry about global trade tensions as they could spill over to India. It could be the biggest source of risk. We have to focus on the G20 meet scheduled for June 29. It will be crucial.

Slowdown in consumer companies was a soft patch and it has ended. It happened on coming together of multiple factors including elections, NBFC lending problem, etc. But if you are a stock market investor, you cannot wait looking at these temporary factors. The price to earnings (PE) is a little bit of a problem for the markets because the earnings are depressed. If earnings are down, PE will look inflated. Therefore, I prefer price-to-book value as a key factor for market valuations rather than PE. The book value for Sensex is around 3.

What are your near-term expectations from the Centre?
Hope fiscal deficit is managed well and markets will be fine. Budget is no longer a platform to announce structural reforms. Big expectation is now on policy in direct taxes, which has been in the works for a long time now. If not in this Budget, it is expected that a policy on direct taxes is announced by next year.

The government has managed well on the expenditure side and (I) don’t expect much slippages there. GST revenue will accelerate this year. There is an opportunity we have on manufacturing due to US-China trade tensions and will wait to see how government rolls out policy to gain from the opportunity.

India could potentially attract a few western manufacturing companies to come here, but it will require very proactive policy — direct negotiations with these companies.
 
Published on June 17, 2019


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