Bullish Rakesh Arora, Head of Research – India at Macquarie Capital Securities has a new Nifty target of 9,960 for the next 12 months. He expects earnings to grow 19-20 percent and adds that this fresh Nifty target is driven by 15 times earnings estimate for FY17. Given the ongoing slide in global oil prices, he foresees more upside to the market if this fall continues further.
Further he adds that hope trade in India will continue for some more time and the market is unlikely to see major correction anytime soon. If any correction happens, it will be limited to 4-5 percent, he said.
On specific-sectors, Arora is overweight on industrials, banks and auto. Axis Bank , ICICI Bank , Maruti Suzuki and L&T are his top stock bets. From the midcap space, he is positive on TVS Motor and Crompton Greave . He expects stocks like TVS Motors and Maruti to see 20-25 percent volume growth going ahead. He is also largely bullish on capital goods stocks like Thermax and IRB Infra . He likes HPCL amongst oil marketing companies.
He is underweight on consumer staples, energy and utilities. He recommends staying away from JP Associates , GVK and GMR Infra .
Below is the verbatim transcript of Rakesh Arora’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: A fresh old time high has been set by the Nifty. Are you raising your Nifty target for 2015?
A: Our new target is 9,960 which is 17 percent upside from current levels and this is driven by 15 times earning estimate for FY17. Largely this is in line with 17 year average price to earnings (PE) multiples that we have seen for the market. We don’t think there is going to be much of PE rating from here on because current multiples are consistent with around 6.5-7 percent gross domestic product (GDP) growth which is what we are forecasting for next year. So, clearly it is going to be earnings driven from here on and PE should remain at around 5 times for next year.
Sonia: Is there any upside risk to your nifty targets if crude falls further?
A: At the moment it is difficult to say but earnings for FY16 &17 are conservatively forecasted by consensus to grow at 19-20 percent. There is a huge amount of operating and financial leverage to it. For every 100 basis point drop in inflation which will happen if crude continues to fall, there is a 30 bps improvement in EBITDA margins for top 200 companies.
This could mean around 1 percentage point into earnings growth. So, if crude starts to fall more aggressively, there could be upside. However, at the moment looking at the current conditions and how the economy is picking up, we are comfortable with this kind of 19-20 percent earnings growth for the market at the moment.
Latha: What are the themes that one can play now? Which are the stocks that will be the leaders of this rally to the almost 10,000 mark?
A: So, largely we are playing 2-3 key themes out there. We are looking at revival in infrastructure spending; we are looking at interest rate cuts to start to happen and also inflation dropping off. So, in this context 2-3 sectors stand out in a big way. First one is industrials where we have the highest overweight, then banks and the third is autos.
So, we are playing the theme of infrastructure, interest rate cuts and inflation through these sectors.
We are underweight on staples, materials, utilities to compensate for this overweight. Among the stocks we are pushing Axis Bank, ICICI Bank, Larsen & Toubro (L&T), Maruti Suzuki and Tata Consultancy Services (TCS) these are our top 5 ideas. Among the midcaps we have Crompton Greaves, TVS Motor and Strides Arcolab, these are top 3 midcap ideas.
Sonia: Yesterday we saw a big spurt in metal stocks like Jindal Steel and Power Limited (JSPL). We have seen coal prices fall significantly. Will there be a big impact on names like JSPL or is it just short-covering?
A: Companies like JSPL are trading at extremely low valuations and these have been one of the most favorite stocks shooting in the market. Any kind of buying can lead to large short coverings which is we are seeing in the stock at the moment. I don’t think they benefit immediately from lower coal prices globally because these are largely dependent on coal availability in India which hasn’t improved much despite Coal India’s good efforts. So, we are seeing much of short covering at this point of time and also it is a reminder to a lot of investors that these stocks are at extremely cheap valuations and one should refrain from shorting at these levels, there is a chance of getting caught in this short trade.