Ambit Capital’s Saurabh Mukherjea: Sensex earnings to log a 15% rise in FY 2019
Mumbai: India is in the late stages of a bull market, and getting ready for the final frenzy, says Saurabh Mukherjea, chief executive of Ambit Capital Pvt. Ltd. He expects Sensex earnings to log a 15% rise in fiscal year 2019, but says that’s also priced in. However, market may still rise as investors would applaud a recovery in economy and consequently corporate earnings, he said in an interview. Edited excerpts:
What is your outlook for the market for 2018?
We are not in a raging runaway bull market as yet. We are in the late stages of a bull market, and getting ready for the final frenzy.
I had said last year that the markets were fully valued, and I am saying this right now too that they are fully valued. So, although we expect GDP growth to recover and we expect Sensex earnings growth to hit 15% in fiscal year 2019 (for the first time in five years, we are expecting double-digit earnings growth), we find Sensex to be fully valued.
On rational grounds, it is difficult to see how the index can see meaningful upside in 2018. That being said, rationality is not something that one should expect from the stock market. Since (we) will see the first meaningful pickup in earnings in a long time, investors will get excited and buy into the market. That could create a frenzy in the market in 2018.
On a separate note, if you have an earnings pick-up, if you have government reflating the economy through PSU bank recap, through fiscal stimulus, Bharatmala etc,—then we have taken the view that one should be overweight cyclicals.
What are the key risks for the Indian market?
CPI (Consumer price index-based) inflation seems to be coming back. There are a lot of indicators that inflation is revving up in India, and RBI (Reserve Bank of India) will be compelled to hike rates sooner rather than later, and that could happen next summer.
Which sectors would you avoid currently, and which sectors do you really like at this point?
One element of cyclicals that investors should be wary of is wholesale market funded lenders. These are NBFCs (non-banking financial companies), housing finance companies and some private sector banks. For such lenders, the cost of wholesale market money will rise sharply, and potentially they will have to pass that hike to the customer. That in turn may result in higher NPAs (non-performing assets).
We may see a correction in these stocks, and these account for nearly 20% of the market’s weight now. This, I believe would be a healthy correction.
The steel sector and the road building companies look specifically attractive in the cyclical space. They are more natural plays on reflation and GDP pick-up.
What is your take on Gujarat election results, and what could be the impact going ahead?
To be fair to all concerned, the results were broadly in line with the market expectations. I am not so sure if it has profound policy ramifications.
That being said, for decades now, it is a norm for every government to throw money at the poor in the 12-month run-up to the general elections. I think we could see a pro-poor budget, with heavy focus on affordable housing and direct benefit transfer.
We saw a lot of listings in the insurance space. What is your view on insurance companies in BFSI (banking, financial services and insurance)?
Insurance is a space that we like because of the financialization of savings in India. Indians are gradually shedding their obsession with buying real estate and gold, and moving toward financial products such as mutual funds and insurance. There will be more primary market activity in the context of financial services.
Investing in opportunities in the savings space should to my mind take precedence over investing in the lending space. Savings is an unconquered space. Within the savings space, mutual funds are the most attractive plays. One notch below that would be the life insurance space, and a notch below that would be pure-play stock brokers.
The IPO (initial public offering) market has been buzzing with activity. Is it frothy already?
I don’t think we are there as yet. We are still getting reasonable quality of companies that are launching IPOs, and we have not yet seen shell companies trying to game the retail investor and raise funds.
With demonetisation, we saw 99% of the notes returning into the system. We are seeing a lot of hiccups with GST (goods & services tax) implementation too. What are your thoughts on the government’s reforms process?
I think the government’s overwhelming focus in the coming year will be to get GST implementation in place. There is plenty to be done on that front. All reforms usually come to a halt in India six months ahead of elections. So effectively, we are now in the final lap in the life of the current Lok Sabha.