'Modi to focus on infra spending, bet on real estate, cement and capital goods'

Given the recent slowdown in consumption sectors and the correction witnessed in the stocks, it provides a good entry point for the investors to play India’s consumption story.

At current levels, Nifty is trading at peak valuations and at a significant premium to other emerging markets. Hence, corporate earnings' revival and maintaining fiscal prudence is essential for sustenance of such premium, said Jayant Manglik, President - Retail Distribution, Religare Broking in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpts:

Q: As Modi government begins its second term, is it time to buy midcap stocks?

A: After a sharp correction from peak levels, the midcap index seems to have formed a base over the last six months and is showing some positive momentum, led by value buying across select midcap companies, which are delivering strong numbers and are attractively valued.

While the benchmark indices are trading at peak valuations, BSE mid-cap index is still trading nearly 18 percent below its peak level, which leaves enough room for appreciation.

With medium to long term investment horizon, midcap counters with valuation comfort, improving earnings prospects, prudent management and healthy balance sheet can certainly be considered for investment purpose. We feel taking a stock specific view rather than timing the markets would certainly be a prudent approach.

Q: Any revisions to your Sensex and Nifty targets post election results and March quarter earnings?

A: Notably, at current levels, the Nifty index is trading at peak valuations and at a significant premium to other emerging markets. Hence, corporate earnings' revival and maintaining fiscal prudence is essential for sustenance of such premium.

Corporate earnings have been disappointing over the last two years. This quarter has been no different thus far, leading to further downgrade in earnings.

This could cap upside in the near term. However, in 2-3 years, we expect earnings to revive on the back of anticipated revival in consumption, economic growth and favourable base.

Notwithstanding the near term volatility and assuming a conservative low double-digit earnings growth over the next two years, there is still decent scope for appreciation for benchmark indices from current levels.

Q: How did you view the March quarter earnings? Will the earnings growth strengthen in FY20?

A: Corporate earnings have had muted performance in the last few quarters, and the March quarter was no different as earnings remained subdued and mixed.

Topline grew in higher single digits for many companies as demand slowdown resulted in poor volume off-take. Even the bottom line numbers were disappointing due to weak operating leverage and increased pressure on margins, impacted by rising input costs and other commodity prices.

Notwithstanding the near term challenges over the next one or two quarters, we expect earnings growth to revive to low double digits in FY20 on the back of a pick-up in consumer sentiments, anticipated revival in rural demand, improved volume off-take, controlled cost measures and continued reform implementation.

Q: How do you see liquidity situation in India after general election results?

A: Consecutive wins will strengthen the NDA government's position and shall allow it to continue focusing on pending policies and reforms, take steps to improve the fiscal situation and revive economic growth.

The government along with RBI will also jointly work towards resolving NBFCs liquidity crisis, which will help in bringing stability to the financial system.

Notably, a clear mandate to NDA has provided RBI with enough headroom to cut interest rates and take steps to infuse liquidity and promote credit growth.

Successful implementation of reforms and revival in earnings growth could keep the DII and FII inflows intact over medium to long term.

Q: What sectors or themes should be in focus in coming quarters?

A: Given the recent slowdown in consumption sectors and the correction witnessed in the stocks, it provides a good entry point for the investors to play India’s consumption story.

Additionally, the Modi government is expected to increase its focus on infrastructure spending, which would be beneficial for sectors like real estate, cement and capital goods.

We believe one should play domestic centric themes as they are likely to be a key beneficiary.

Q: Do you think a repo rate cut by RBI is imminent? 

A: The RBI monetary policy committee considers a number of factors before such decisions.

Firstly, the inflation number, which has been on the rise in the last three months, but still remains below RBI’s target levels.

Also, due to a slowdown across the consumption sectors, economic growth is expected to remain below par. Hence, current economic scenario, benign inflation and with political uncertainty out of the way, there is a compelling case for a rate cut in the upcoming RBI policy.

However, we believe that the RBI would not go aggressive on rate cuts as it would await the progress of monsoon which is expected to be erratic this season. Additionally, RBI's focus in the upcoming policy would be to ensure that recent rate cuts are passed on by the banks.

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