The economic revival is a time taking process as the current slowdown has been led by various structural factors, Naveen Kulkarni, head of research at Reliance Securities said in an interview with CNBCTV18.com. He added that large caps typically are more mature companies and have better cash flow profile than midcaps and will be preferred in the current environment. Edited Excerpts:
There is a lot of noise in the market about a revival in sentiment post the corporate tax rate cuts, what is your view?
Economic revival is a time staking process as the current slowdown has been led by various structural factors. Cut in tax rate is a major structural reform. It will take time to attract new investments which will lead to job creation and economic revival. In the short term, the macro challenges will have an impact but the tax cut boost is very likely to play out in the medium term.
The markets rose over 8 percent post the tax cuts but the rally was short-lived. Do you think the markets have settled or do you see a further rise in the near term?
Markets should settle as one clear outcome of the tax reform is that earnings visibility over the medium term has improved. There are certain challenges in the BFSI
What are your thoughts on the way market correction has panned out? In the last one and a half years, the way growth has moderated, should investors brace for lower returns?
Indian equity markets over the long term of the last 20 years have delivered a return of 12 percent CAGR. This is unlikely to change over the next few years. However, the Indian equity markets are far more evolved than 20 years back and a consistent 12 percent CAGR return means a significantly higher return compared to other asset classes.
Which section of the market right now offers the best risk-reward — the midcaps, small caps or large caps? Your top picks in these spaces?
There are opportunities across the sectors. However, the banking sector offers very good risk-reward benefits with stocks like ICICI Bank, HDFC Bank, and Axis Bank. We also find the cement sector well placed to deliver decent returns with our top picks being Ultratech and JK Cement. In midcap space, we continue to like the IT midcap space with Sonata Software and Hexaware as our top ideas.
Do you think there is value if somebody wants to invest in the mid- or the smallcap space or should one stick to the largecap space in this environment?
Investing in the current environment is clearly based on cashflow visibility and growth. Stocks offering strong cash flows will continue to see increased allocation. Largecaps typically are more mature companies and have better cash flow profile than midcaps and will be preferred in the current environment.
Do you think the non-bank finance company (NBFC) problem is behind us or will it continue to drag the sentiment further?
The NBFC challenge will take time to sort out as the sector growth was quite phenomenal on cheap credit. This problem is more likely to linger for some more time.
Globally, what factors can change the direction of the markets?
Global factors continue to remain a challenge but the US and China economic growth are very critical. Trade tensions have been abound and there are no straightforward solutions to the current issues. Thus, global news factors are likely to remain a mixed bag. However, for India and the equity market, crude oil prices will play an important role. While crude oil prices should remain range-bound if it appreciates sharply then it will put a lot of pressure on the economy.
In terms of auto players, which are the stocks that you like?
We find Hero Motors to be relatively better placed on account of solid cash flows, dividend yield, and valuations. We believe the sector will take time to revive but the stocks are at a near-term bottom.
Safe bets like HDFC, HDFC Bank, ICICI Bank have also seen a considerable correction. Is it the right time to invest in those? what are your safe bets during volatility?
Yes, high-quality banks are good investment candidates.
First Published: Oct 7, 2019 9:40 AM IST
