Any disruption of trade ties between India and China will substantially hurt Indian businesses given their limited manufacturing ability. On the other hand, defence is the only sector which may emerge as winner if the stand-off prolongs," Siddhartha Khemka, Senior Vice President | Head-Retail Research at Motilal Oswal Financial Services said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Do you think India-China border situation is really a big concern now?
We believe that both the nations would make an effort to resolve the situation with dialogue as escalation could have political, economic, diplomatic and cultural consequences. In case it aggravates, it would be a big challenge in front of India as it heavily relies on China for imports.
China accounts for around 14 percent of India's total imports, while India's total exports to the country is a mere 3 percent. This trade deficit with China, also a major contributor to India's overall trade deficit, is one of the world's biggest trade deficits between two nations. Thus this geopolitical tension could add further uncertainty to companies that are already reeling under the coronavirus pandemic.
A large extent of companies import parts or capital from China; thus they would have to find alternative sources if tensions escalate.
Further, there is a huge amount of Chinese investment in India. Thus any disruption of trade ties between the two countries will substantially hurt Indian businesses given their limited manufacturing ability.
On the other hand, defence is the only sector which may emerge as winner if the standoff prolongs.
Q: Market after consolidation again gained strength to march upwards, though there is still risk in terms of rising coronavirus infections. Do you global liquidity (or any other strong reason) can take it above 11,000 mark in coming weeks?
Indian equity markets moved up sharply by more than 35 percent from its panic bottom in March 2020 as investors ignored near-term growth concerns and cheered the gradual easing of the lockdown and good monsoon prediction.
Given the sharp rally witnessed, we may see the Indian markets consolidating or taking a breather for some-time before starting the next leg of rally.
While the momentum may continue in the near term, one should be cautious going ahead as the fundamentals continue to be weak and valuations seem to be expensive at around 21x FY20 P/E. As of now, we expect Nifty EPS to growth to remain flattish in FY21E with a marginal growth of around 2-3 percent to Rs 485. Going ahead, we believe, if the situation continues to constantly improve, we may reach 11,000 in a span of 2-3 months along with the support from the global liquidity.
Q: Reliance Industries achieved its net debt free target well ahead of its target of March 31, 2021. Do you think the stock can cross Rs 2,000 mark soon?
Decline in overall debt by Reliance Industries is a major factor, can lead to next leg of rerating of the stock. Overall the company has raised more than Rs 1.68 lakh core in two months since April.
This reaffirms Jio's potential transformation as a technology giant in the eyes of global investors. Reliance Jio's dominant position should allow it to garner strong consistent growth over the long term.
We are positive on Reliance Jio's multiple monetization avenues coming from increasing long-term ARPUs and other digital applications with the Facebook deal.
Reliance Retail, too, has maintained robust performance amidst a slowing economy. Its grocery segment is likely to support revenues during the lockdown phase and its strategic venture with Facebook to connect local kirana stores should provide synergies and scale its online business further.
Q: Midcap and Smallcaps traded in line with benchmarks for last three weeks. Does it mean that the worst is over now?
We have seen increased market interest in Mid/Smallcaps in the last few days as market optimism increased over the gradual reopening and faster than expected recovery in the economy. Management commentaries from various companies across sectors are pointing out towards a pent-up demand which atleast takes care of the near term. Mid / small caps have been underperforming the larger peers over the last 2 years.
The Nifty Midcap 100 P/E ratio now trades at around 15-17 percent discount to largecaps. However given the uncertain times, markets are likely to remain volatile. Hence we would suggest investors to largely stay with quality largecaps while midcaps may be looked upon on a selective basis.
Q: Banking and financials has been the key factor for directional move on either side in the last one month or so. What does it indicate, as it is the backbone of the economy?
Further, COVID-19 pandemic has significantly dented the earnings/asset quality outlook for the banking sector. Lending being a leveraged business faces significant valuation risks in such an uncertain environment however banking subsidiaries which have gained significant scale / profitability are relatively well placed to withstand current environment.
The monetization of subsidiaries in the past has helped banks in raising funds and shoring up capital. Thus the SOTP story for banks provide a significant support to overall valuations. The contribution of subs to consolidated profits has thus been increasing steadily with banks facing asset quality challenges while subsidiaries reporting better trends and gaining share.
We continue to maintain our preference for ICICI Bank, HDFC Bank and SBI.
Q: What are your thoughts on the Supreme Court's comments on the AGR issue? And also what is you take on entire telecom space and do you expect more tariff hikes in coming months as there are only three players?
View on telecom remains positive as we believe that the system recognizes the strategic significance of sector. Also, we believe that Vodafone Idea needs to survive, and India cannot be a two-player telecom market, as it would result in an extended effect on other sectors such as Banking, telecom vendors, technology partners, and others.
Deferring the hearing to the third week of July 2020, the Supreme Court asked telcos to create a proposal to either make a reasonable upfront payment or furnish undertakings to claim the benefit of staggered payments. The biggest positive was that the SC took cognizance of VIL's statement that it did not have the means to make additional bank guarantees and would be compelled to shut shop, witnessing major repercussions, if asked to pay immediately. However, the SC seems unrelenting and determined to not concede without any concrete plan. We believe another tariff hike is inevitable, driven by VIL's need for survival, the stressed balance sheets of the telcos, and an increase in the sector's importance due to the current crisis. Given both Bharti Airtel and Reliance Jio's better cashflow positions, these companies could see strong benefit from the potential tariff hikes.
Q: Which sectors should one - stick to; and avoid now?
Post COVID-19 pandemic, some of the themes /sectors we believe could emerge as leaders are Telecom, Healthcare, Speciality Chemicals, while one can look at Rural consumer space as a recovery play. We expect Cyclicals, Infrastructure and Commodities to underperform till we see more stability in global and domestic economy.
Telecom is one sector which has seen rise in usage and continued business operations during the past few months. With the lockdowns and work from home, usage of phone and data has increased multifold. With consolidation phase over in telecom, we can expect improving tariffs / ARPUs along with low capex going ahead to support financials over the next 2-3 years. Bharti Airtel is our preferred pick in the space followed by Jio through Reliance Industries.
Healthcare is a defensive play. Though the sector had been under pressure for last few years, the pandemic has opened up lot of opportunities for the sector. We have not only seen improved regulatory environment, but also higher demand. We like diversified players like Dr Reddy's Labs. Some unique plays would be API manufacturers (Divi's Lab, Alkem Labs), Diagnostic labs (Dr Lal Pathlabs), medical insurance (ICICI Lombard) in the overall healthcare space.
Indian Specialty Chemical manufacturers are benefiting from the Increasing trend of de-risking of procurement from China by global chemical leaders. Additionally, depreciation of rupee and sharp correction in crude price should also benefit. We like companies like PI Industries and SRF in this space.
The rural economy is looking attractive due to various leavers like good Rabi Crop Season, forecast of a Normal Monsoon, Government Spending and increase in MSP, Urban migrant labor going back to the villages. All these are likely to boost demand for the rural economy. Within the rural plays one can look at segments such as Tractors (M&M), Two-wheelers (Hero MotoCorp), and Select FMCG (HUL, Britannia)
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