Ahead of UBS India’s 5th annual SMID (small and midcap) conference, UBS Securities lowered its year-end Nifty target to 8600 from 9600. UBS’s research note states market expectations in terms of pace of growth recovery needs to further reset downwards.
Gautam Chhaochharia, head of India research at UBS Securities, says it just reflects revision in earnings estimates. The lower Nifty target, however, continues to be based on 17x one-year forward PE, he adds. According to him, deflation is hurting corporate earnings.
Despite this, as far as the annual conference is concerned, Chhaochharia says interest for India remains high among investors (foreign), almost at the same level as last year this time.
He says there is a cyclical recovery in the economy and weak monsoon if at all will only hurt marginally since most of it is already in the price.
He is bullish on Info Edge in the e-commerce space and likes the auto anciallary space as a whole. He feels auto ancillaries may be a better way to play the auto sector for now.
Below is the verbatim transcript of Gautam Chhaochharia’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: How is the mood looking like, is it that there is an increased interest in midcaps or has the fall in the share prices dried up some enthusiasm?
A: We are seeing the level of interest among investors very similar to same time last year. Do remember that same time last year was kind of a euphoric environment for India where investors were just jumping in. Despite what has happened over last 3-4 months in India that is a slow down etc we are seeing investors interest remaining very high. In fact in terms of number of investors or in terms of number of overseas foreign investors we are seeing the levels being very similar to last year. We are seeing foreign investors coming and exploring new ideas possibly because the opportunities could be more attractive now but primarily because of the interesting ideas from a longer term perspective.
Sonia: You have once again scaled down your year end Nifty target and it now stands at about 8,600 versus it being 9,600 at the start of the year. What is the rationale behind this slightly more cautious outlook than what you had at the beginning of the year?
A: This is a December 2015 target, not a one year target. Secondly, the entire cut in index target just reflects the reset of earnings estimate, nothing else. So, it is still based on 17 times one year forward estimates but the earnings cut and our top-down estimates of 10 percent earnings growth in FY16 and 18 percent in FY17 that is what baked into this target. This target still remains based on 17 times one year forward PE multiple.
So, basically there is an entire thesis of growth expectations being reset which has happened over last three to four months; that is getting priced in into the market and our Nifty target. Having said that, this has been our thesis since early last year about growth recovery taking time and FY17 being the first big year.
However, even we were taken by surprise and one of things which has hurt Indian corporate earnings more than economic activity, etc is also deflation. We all know India is having deflation on wholesale price index (WPI) for last seven months and that is hurting corporate nominal topline and therefore earnings.
Latha: Is this across the board or is there specific sectors that have gotten scaled down in your move from 9,600 to 8,600?
A: It is across the board actually, if you see earnings estimate cut it is fairly broad based, I can’t pinpoint a single sector where it has been disproportionate as such.
Latha: We haven’t spoken about online, at one point in time we saw such huge rallies in and around that online theme. What do you like?
A: We like MakeMyTrip and Info Edge in the ecommerce space in terms of listed companies in India. So those are our favourite picks in that space.
Latha: What about auto ancillaries, same time last year, the big guys in the midcap space used to be the Bharat Forge ‘s, Motherson Sumi ‘s, Amtek ‘s – some of them are still roaring but some of them have become weak. What is the sense in that space and generally even the commercial vehicle (CV) cycle picking up so generally in the auto space what are you preferring?
A: We like the auto ancillary space as an overall sector also. Each of the names there are very unique stories. Some are export stories, some are local cyclical recovery stories, some are IT linked stories but the overall space seems interesting to us. In fact in our work it kind of indicates that this could be a better way to play the automobile sector in India than just play the original equipment manufacturers (OEMs).
Sonia: You have an exposure or rather you like a couple of these names like Emami and Cholamandalam that have an exposure to the rural market. We were just speaking with the Indian Meteorological Department (IMD) and they indicated that the monsoons have been delayed because of that Arabian cyclonic storm and they could be delayed some more. Would the progress of the monsoon concern you and how would you approach some of these monsoon linked stocks?
A: A delayed monsoon or a weak monsoon would hurt at the margin. However, will it big a negative impact? That is something which is beyond what is already built into estimates, beyond what is already being factored in by the market; that is a critical part. So, a weak monsoon hurts marginally, that won’t be a big delta for our fundamentals from what is already baked in. However, if it is a real bad drought like we saw in 2009 and 2002, then it could hurt at the margin.
Latha: While you are looking at about a 5 percent gain at a Index level or little less if 8,600 it is, Do you think in your bunch of midcap stocks there would be a decent outperformance, a portfolio of MakeMyTrip, Info Edge, Cholamandalam , Emami , Voltas and SKS Microfinance would your Index significantly outperform the 5 percent growth you see in the Nifty?
A: We would hope, so but again overall midcap as an asset class from strategy perspective we are still neutral. We are recommending a selective approach since last 6 months rather than over-weighting the midcaps as a basket because the relative valuations for midcap versus largecap is near all time highs. So that is not supportive of any further re-rating for midcaps. However, yes in India midcaps there is always selective bottom-up name and that is what we focus on in terms of our recommendations or the conference.
Sonia: You like Voltas as well it continues to be your top pick in the cyclical are you noticing any recovery at all in the investment cycle and would you restrict your picks to just Voltas or do you think now some of the larger names the Larsen & Toubro (L&T), BHEL also deserve a look in?
A: Our top down view is that there is a cyclical recovery in the economy as a whole as well as in the investment capex cycle will be a very gradual one. Specifically in investment and capex cycle it will be very selective it won’t be as broad based as you saw last decade. It is too early for all that. Only select areas of capex activity will see pickup over the next two years. The rest will take much longer. So, you have to be much more selective in terms of stocks and overall sectorally we are still maintaining a neutral stance on industrials and power.
Latha: We have got a couple of reports from some brokerages enthused by Centre for Monitoring Indian Economy (CMIE’s) data indicating higher projects starts and higher project completions. As well, yesterday Arun Jaitley announced that 40 percent rise in excise collections and even net a few excise hikes, it is a good 17 percent hike in excise duties. Is all this adding up to something better than you thought?
A: It is too early to extrapolate that. For the CMIE data are read is anyway that is coming up a very low base and those percentage numbers don’t really matter. This kind of showing up from whatever the push the new government has being giving to revive projects that has kind of baked into all these cyclical recovery estimates which is being talked about in the market including us so that is not really a delta yet.
The tax revenue collection numbers again, April is not the best month to extrapolate for a year. Even if we add April and May seasonality in terms of tax collections or even spending patterns of the year these don’t really skew the delta for annualised numbers. If you remember last year we had April-May as pre-election months where activity does slow down a bit. So, it is too early to extrapolate that in a big way so we will wait for a trend o pick up over the next 2-3 months before building in more upside from those numbers.
Sonia: What is your own view on how investors should approach this largecap versus midcap game because last year midcaps saw a huge outperformance but do you think for the rest of 2015 midcaps will continue to see that kind of outperformance or given the run up that many of these stocks have seen, you would be a bit cautious?
A: As an asset class I will definitely be cautious from the short-term point of view for midcaps. However, over the long-term we have seen over the last 5-10 years, midcaps have outperformed largecaps just like any growing developing market. So, from a long-term point of view, I would prefer midcaps. However, from a six months perspective, as an asset class, we will be cautious there. However, India’s midcaps is always about more individual stocks rather than asset class.
Latha: Are you mellowing your numbers at all because of the global environment? Probably because of the rise in Western bond instruments, yields, Bunds as well as US treasuries, we have been seeing and we have heard a lot of people arguing that flows into emerging markets are slowing and could slow further if the yields continue to rise. Is that baked into your 8,600 or do we still remain hostage to further falls because of the global environment.
A: That is kind of factored in into the broad macro framework we are running with. We are not worried about that as being a big negative delta for India as such. In that context, we are still maintaining our stance of inflation and interest rate surprising market and investors positively. I am still sticking to 75 basis point more rate cuts in FY16.