The BL Interview. Raise cash positions, buy at lower levels: Nitin Bhasin, Head of Research at Ambit Capital

With the Indian equity markets dancing to the tune of money flows (foreign as well as domestic) and hitting new highs without meaningful improvement in corporate performance, Nitin Bhasin, Head of Research at Ambit Capital believes there is a need for correction as valuations are expensive and earnings can surprise negatively. Excerpts:

Does the current high levels of the market worry you? What is your advice to investors?

Market valuation is expensive. There should be a correction/ reduction in valuation. I believe there is risk in believing that things are going to be great and FY18 will be a good year post-GST or good monsoon. We are going through some major resets to the Indian economy and hence, earnings can surprise negatively.

Major sectors such as information technology, aviation, non-banking finance companies, healthcare and oil and gas have weak outlook. We advise to raise cash positions in one’s portfolio and buy at lower levels. We are not revising our Sensex target of 31,000 for March 2018.

When do you see the effects of GST reflecting on the corporate performance?

Till demand improves materially, benefits of GST are not going to be visible. Organised gaining over unorganised should happen, albeit gradually. Till September quarter, adoption and adherence will take place. Normalisation will start in the December quarter. One can make sense only by the end of March quarter.

So, you expect FY18 to majorly disappoint?

FY18 would be the third or fourth year of earnings downgrades (another 3-4 per cent downgrade left). It appears difficult for earnings to recover in the second half as the economy on the ground is not that strong, not enough jobs are being created.

At the ground level, we do not see buoyancy. A large part of the Indian economy is either adapting to GST or adjusting to new ways of not operating in cash. Further, real estate market is adopting to major regulatory changes under RERA. Banking industry is going through its own changes (good quality corporate borrowers moving to bonds and past poor quality borrowers creating stress).

What do you think about the blockbuster performance of every alternate IPO listings?

We have our reservations about certain recent IPOs. It is the liquidity which is driving the performance of even a not-so-good IPO. However, Avenue Supermarts and CDSL are genuinely good.

Why are you bearish on the “buzzing” NBFC stocks?

Stock prices of NBFCs are going up due to sentiment, momentum and flows. Most of the NBFCs are trading at expensive valuations. Investors are chasing NBFCs that are into, getting into or could get into affordable housing and SME financing, which are the new buzzwords. However, we don’t think that these opportunities are as big or lucrative as is the general view. While there have been many launches in affordable housing, where are the buyers? Affordable housing is for the people who get new jobs. If job creation is not happening, from where will the buyers (borrowers) come?

What are your top 10 picks? And why?

We like Indian Oil Corp, Tata Motors, Dabur India , Petronet LNG, Bharat Electronics, PI Industries, Aarti Industries, Dainik Bhaskar, Mahindra CIE, Trent and Page Industries. These are based on our criteria for bottom-up approach such as strong balance sheet, clean management (no political connections), competitive advantage, robust cash flow generation and valuation.

COMMENT NOW