Based on board index like Nifty-500, we can assess that about 60-65% of the stocks are currently valued below their 7-years average valuation on P/E basis which is very attractive, Vinod Nair, head of research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q: Due to lack of any additional triggers, do you think the geopolitical concerns are likely to add further volatility in markets and cap upside?
A: Political strategist believes that geopolitical risk has turned for the worse with a possibility that this calamity can get extended.
The market will remain watchful and eagerly assess announcements from both sides to evaluate further risk. We hope that this will be a shortened situation.
Q: Do you think most of the stocks that have corrected have bottomed?
A: Based on a broad index like Nifty500, we can assess that about 60-65 percent of the stocks are currently valued below their 7-year average valuation on P/E basis, which is very attractive.
This is a good time to develop a portfolio of quality mid and small-caps with a two to three years investment perspective.
We can conclude that the majority of stocks have corrected well but a few blue-chips and sectors like FMCG, consumer discretionary, chemicals and IT are on the higher side.
Q: How should value investors filter stocks that have seen a double-digit fall in the year 2019 especially from the mid and small-cap space? And, is this time to pick value stocks?
A: Yes, we completely agree that this is a good time to find value stock since valuation based on P/E and P/B has become very lucrative on a long history of last seven years.
A good way to identify stocks is by categorizing the sector that has a very positive outlook since such stocks can give better returns in the future.
Based on correction in price and valuation, examine how much lower it has reached with the historical data of the last five to seven years, stocks can be identified.
Currently, we suggest sectors like banking, infra, cement, chemical and oil & gas for above normal return in the long-term.
Q: What is your advice to investors with regards to promoter pledging? Should they stay clear of the stocks that have come under the radar?
A: We continue to advise our clients to avoid over-leveraged stocks. This issue had got highlighted this time due to two reasons—continued fall in mid and smallcaps due to which pledging has increased automatically and tightened finance situation of NBFC and banks.
Specifically, the stock issue increases when pledging goes beyond 50 percent. Currently, we will have to be careful and take a call as per the leverage situation of the company in the future.
If there is a possibility that the pledge position will moderate in the future with a positive business outlook, this could be an opportunity to play accordingly with a risk.
Q: With additional volatility in equity markets it looks like investors are turning risk-averse. They are probably looking at fixed income products that seem to be back in flavour. What do you think?
A: Investors have been risk-averse since the last one year, and now prices and valuation of the broad market have become modest.
It is possible that inflows in equity may remain muted for some more time given the current domestic and global headwinds. But, this is the time to churn your portfolio over the next three to six months and increase the mix of mid and smallcaps.
At the same time, we will have to reduce a few bluechips which are very expensive today and may not be maintained in the long-term.
Q: Most of the investor portfolios are bleeding and I have come across a lot of people who have sold their MFs and turned towards FDs. What would be your advice to them?
A: If the above-mentioned strategy was done about a year ago on hindsight it looks like the best plan for lump sum investments. Shifting into debt schemes could also have been a good plan in the meantime.
But, today doing the same thing is not advisable. Today we are advising our investors to continue their SIP on investment in the mid and small-cap schemes for long-term gains.
The interest rate in India is likely to reduce by about 50 bps in the coming two to three quarters that is negative for debt while positive for equity. FD is not prudent to advise today.
Q: Any top five stocks which you think are good buys after recent carnage and why?
A: Some value Mid & Smallcaps available today are:
Bharat Electronics Limited
BEL’s current order backlog is Rs 48,000 crore (5x FY18 sales) provides strong visibility for the next three years. 9MFY19 order inflow was up by 145 percent to Rs 16,500 crore.
Given BEL’s niche technological and execution capabilities, improved order inflow outlook and GoI focus on indigenous procurement, we remain positive on BEL.
Currently, BEL is trading at a 1-year forward P/E of 11.7x, which is a 38 percent discount to its 5-year average of 19x. It seems an attractive bet given strong order book visibility.
Exide Industries:
EIL is focusing on cost control initiatives and technological up-gradation as strategies will improve the market share from the unorganised sectors.
We expect the demand scenario for 2W to remain strong for FY20 led by increased rural income, higher MSP and new product launches by OEMs.
EIL will be the direct beneficiary as it has 86 percent market share in two-wheelers. We remain positive on the long term outlook of EIL, owing to higher acceptance of battery engineering.
We value EIL at 15x FY21EPS (20 percent discount to its historical average) and insurance business at 2x FY18 EV (embedded value).
Avanti Feeds:
AFL has recently completed its major capacity expansions in both Feeds (1,75,000MT-40 percent of existing capacity) and Processing (15,000MT- 200 percent of existing capacity) segments that will support future growth.
AFL has a strong track record of growing above industry growth in the last five years. In FY18, it witnessed an unusual margin gain of 750bps which is unlikely to sustain due to subsequent correction in shrimp and RM prices and demand slowdown in the US.
We expect PAT to de-grow in FY19E but to normalize post FY19E. AFL is diversifying shrimp exports to Europe and China and is planning feed export to other countries which will support revenue growth.
AFL is currently trading at 11x 1Yr Fwd P/E which is at 49 percent discount to its 2-year average.
Can Fin Homes:
In Q3FY19, the net interest income (NII) grew at a modest pace of 8 percent on a YoY basis, with NIM at 3.3 percent and net profit increased 21 percent YoY on the back of zero provision cost.
We expect net profit to increase at a CAGR of 16 percent over FY18-21E led by healthy growth in loan book along with lower provisioning expenses.
We continue to remain positive on the stock on the back of healthy asset quality, a well-balanced borrowing profile and consistent management focus.
Going forward, we expect the company to generate RoA of ~2 percent and RoE of 20 percent over FY18-21E. Currently, the company is trading at 1-year forward P/B of 1.8x, which is at 36 percent discount to its 5-year average of 2.8x.
PNC Infratech:
The company reported a robust revenue growth of 54 percent YoY to Rs 727 crore in Q3FY19 led by strong execution of big-ticket orders.
While 9MFY19 revenue growth remains strong at 86 percent YoY to Rs 2,021 crore, PNC has received financial closure for all seven projects and four of these projects achieved appointed date and execution is currently in progress.
Order book remains robust at Rs 12,478 crore, which is 4.5x TTM revenue that provides improved visibility in the coming years. Execution is likely to smoothen going forward as the majority of its project’s construction has started.
Additionally, Nagpur– Mumbai expressway EPC project (Rs 2,000 crore) received the appointed date and project is currently under construction.
The benefit of higher execution and operational efficiency will stimulate earnings to grow at a CAGR of 27 percent over FY18-21E. Currently, the PNC is trading at 1-year forward P/E of 12x, which is at 32 percent discount to its 5-year average.
First Published: Mar 6, 2019 2:01 PM IST
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