Small cap, micro-cap stocks may fall further, use corrections for cherry-picking, says Dharmesh Kant
- In Tata Group, going by business prospects and outlook Tata Motors, TCS and Tata Elxsi look promising from a long-term perspective, says Dharmesh Kant of Cholamandalam Securities.
The smallcap and microcap stocks have more room for correction and the next two quarters seem to be difficult for these companies, says Dharmesh Kant, Head of Equity Research, Cholamandalam Securities. He believes good value opportunities in the Indian stock market may arise after 5% to 7% correction in the Nifty 50 from top, while sectors like railway infrastructure, power, select financials, auto ancillary and others to be looked at amid correction.
Q. Of late, it is observed that the market is consolidating at higher levels. Do you see the trend continuing for some time in the near future and what are the key triggers that can potentially help markets to see a decisive trend?
A. The trend is likely to prevail for the next couple of months. To my mind, the market has fully discounted the highly likely possibility of continuity of the present government at the center in upcoming general elections (May’24). On the global front as well things are playing out as desired. The US delivered real GDP growth of 2.50% for CY '23 and monetary measures have been effective in bringing the headline inflation down to the 3.1% mark, where it has been stickier for the last three months. The probability of interest rate cuts in the US has now shifted to June’24 (70% as per consensus forecasts). As of now the trend is upward with minor volatility in between as is the nature of equity markets.
What can potentially derail this trend is inflation returning back. China may play the spoilsport. It is hard-pressed to stimulate its economy and in doing so it can resort to measures that are inflationary by design. It has already resorted to two interest rate cuts over the past one year. Not to forget it is the largest commodity consumer in the world. Only the return of inflation is a concern in the present set-up.
Q. The FPIs have turned net buyers this month amid a drop in US bond yields and expectations of rate cuts. How might the latest US inflation data and other domestic macroeconomic indicators influence trends in FPI flows?
A. FPI flows though welcome are no longer decisive for the health of our equity market. Domestic flows are at all-time highs and far larger than FPI flows. For instance, in the month of Feb’24 flows for SIPs were around ₹19,000 crore plus and in the preceding month it was ₹18,000 crore plus. Also, in the year 2018 FPIs were net sellers of over ₹33,014 crore in the secondary cash market while Nifty 50 returned gains of 3.15% and in the year 2022 FPIs were net sellers of around ₹1,21,439 crore while Nifty 50 was up 4.33%.
US inflation data is stickier around the 3% mark and going by the base effect of last year it will now become difficult to breach 3% on the downside unless there is a soft landing in the US economy. Presently, all macroeconomic lead indicators are pointing to a heated economy.
On the domestic front, corporate earnings were healthy for Q3FY24, and in general, managements sounded buoyant on growth prospects. Overall, indicators are pointing to a healthy uptrend in economic activity.
Q. There are concerns over stretched valuations as evidenced by a 10% decline in the Nifty Smallcap 100 index from its peak. Will we see more corrections further, and could there be potential redemptions from smallcap funds? Is this space a total avoid?
A. There is definitely room for more correction in small and micro-cap space. In fact, this is the very space where earnings for Q3FY24 were disappointing on an aggregate basis. Our proprietary grouping of top 201 to 500 companies on a market capitalisation basis has delivered net profit growth of only 5.28% with low single-digit revenue growth for Q3FY24 when compared to 17.30% PAT growth for large caps (top 50 companies on market cap basis) and 39% for next 150 for the same period. The next two quarters seem to be difficult for small and micro-cap companies.
Q. The Nifty PSU Bank index registered a decent 23% YTD increase. What is the outlook on PSU banks, and is there potential for further upside?
A. All positives seem to be fairly priced in for PSU banks at current levels. There can be trading bounces though.
Q. Among individual stocks, there was a lot of action in Tata Group stocks amid the Tata Sons IPO buzz. Which Tata group stocks do you find attractive?
A. In Tata Group, going by business prospects and outlook Tata Motors, TCS and Tata Elxsi look promising from a long-term perspective.
Q. A much talked about stock, HDFC Bank seems to be still facing merger woes with concerns about underperformance in NIM, sluggish deposit growth, and slower retail growth. What is your outlook on the banking behemoth?
A. HDFC Bank has to negotiate its own set of issues for the foreseeable future. The stock is likely to be range bound ( ₹1,300 to 1,600 zone) till synergies and benefits of the merger start playing out. To my mind, it is still a year away, if everything goes as designed by management.
Q. What are your top picks in the current market landscape?
A. Presently, the better strategy would be to wait for decent corrections, maybe 5% to 7% on Nifty 50 from the top. Thereafter, good value opportunities may arise. Sector-wise, railway infrastructure, power, select financials, metal, auto ancillary and building materials are go to on correction.
Q. The score of economic data helped instill investors' confidence in India’s growth prospects. We will soon be entering the general election in the country, which should cause some kind of uncertainty in the market. In your view, will the upcoming days be volatile and what is your advice to investors?
A. Yes, from here till the elections, markets are likely to remain volatile with sharp spikes up and down. Advice is to use corrections for cherry-picking.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
- Top Gainers
- Top Losers
- 52 Week High