Naveen Kulkarni, head of research, Reliance Securities believes the Union Budget for the fiscal year 2019-20 will present measures to boost the slowing economy but it is unlikely to provide any surprises, given the limited resources with the government. He added that construction, consumer, cement, building material sectors are likely to emerge as major gainers in the budget. Here are the edited excerpts of Kulkarni's interview to CNBC-TV18.
What are your expectations from the upcoming budget? Do you expect any big bang reforms?
Union Budget 2019-20 is unlikely to provide any surprise given the limited resources with the government. We believe Budget 2019 may try to showcase the government’s next five years plan to boost the slowing economic growth with fiscal discipline. A revival of the NBFC sector as to arrest falling GDP growth is the prime need of the hour and that mainly falls under the RBI’s purview. The government may try to target several segments with various sops to boost the ailing economy and job creation.
In addition to a strong focus on infrastructure development and higher income for the rural population, we believe reviving real estate can have a cascading impact on several sectors including cement, metals, building materials, paints, etc. By providing various sops to the housing sector, the government can essentially target to boost many sectors along with job creations and thus supporting economic growth.
What are your top sector and stock picks ahead of the budget?
We believe construction, consumer, cement, building material sectors are likely to emerge as major gainers in the budget. NCC, L&T, HUL, ITC, JK Cement, UltraTech Cement, Escorts and Hero Motocorp are among our top budget picks.
What is your view not just on banks but also on NBFCs, HFCs and insurance and your top picks in the BFSI space?
Banks: While asset quality issues are largely behind for banks, but they continue to grapple with structural concerns on the liability piece, growth concerns with softness in consumption cycle and weak private capex, and slower than expected IBC recoveries (no large recoveries in Q4FY19 and Q1FY20). Nonetheless, credit growth will have some benefits from the continued diversion of credit from NBFCs. We, therefore, like large banks with strong liability franchise, where we expect minimal impact on margin. Moreover, a low impact on asset quality from concerns of slippages from leveraged exposures/NBFCs for large banks also supports our thesis. Our top picks are ICICI Bank, HDFC Bank, and SBI.
NBFCs/HFCs: We continue to witness funding challenges for NBFCs/HFCs which had been aggressive on the borrowing side, resulting in high ALM risks. Developer portfolio will remain an area of watch for both NBFCs/HFCs. We expect HFCs/NBFCs with lower funding side issues to continue to gain market share.
Do you think the consumption stocks have been beaten down enough to start buying at these levels?
Most of the consumer stocks have underperformed its benchmark in the recent past however they have not corrected much on valuations terms as most of them have seen earnings downgrades mainly due to slower volume growth reported in Q4 FY19. Rural headwinds, monsoon outlook and higher base need to be monitored going ahead for volume growth to pick-up. Efforts by the companies on deeper penetration, new product launches, and premiumization trend are likely to help mitigate the recent consumption slowdown and any reversal thereon will be an opportunity to buy the consumer stocks.
HUL growth prospects look promising on a strong premium portfolio, inorganic initiatives, presence in under-penetrated categories, overall market leadership, and capability which is significantly ahead of its peers.
Meanwhile, ITC’s increasing focus on the other-FMCG segment is likely to bridge the valuation gap versus peers going ahead.
Titan’s revenue growth momentum is likely to be driven by market share gains from the unorganized players due to regulatory tailwinds and aggressive store expansion.
What about earnings growth? What kind of recovery are you expecting from companies in Q1 and Q2?
While we believe that earnings growth (ex-BFSI) should be in the range of 10-15 percent in FY20, 1QFY19 earnings do not appear to be healthy considering disruption in consumption amid NBFC crisis and election code of conducts. Our channel checks suggest that there have been volume declines across the consumption space in 1QFY19. However, we expect there should be some spillover impact in 2QFY20, which may result in decent growth in 2QFY20 earnings.
Amid oil price hikes, US-China tensions, US-Iran worries, and India posing tariffs on US products, how do you think the entire global entire scenario will pan out?
With trade wars (US-China) taking the center stage in the past few weeks and recently with IEA lowering global oil demand growth to 1.14mbpd which is below than last 5-year average growth of 1.46mbpd, we believe oil consumption may worsen if the trade war escalates. The rise in the US- Iran worries increase the risk of military conflict in the Middle East region, but it is important to note as well that global oil demand growth has been decelerating sharply in recent months. Based on this scenario, oil prices likely to in the range of $65 to $70/bbl for a period of next six months which does not pose any major threat to India’s oil subsidy bill. Based on our calculations, FY20 cooking fuel subsidy is budgeted at crude price of $68/bbl. It is unlikely that the crude prices will average more than $70/bbl in FY20.
What are some of the so-called contrarian bets that you are looking at?
Some of our contrarian bets are HUL, Jubilant Foodworks and MGL.
Do you see significant upside in the broader markets in the near future or investors will keep betting on safe large-cap stocks?
We believe Nifty50 index to trade sideways in near future after broader indices have already gained 10 percent in 1HCY19. Going forward, markets will take a strong watch on corporate earnings momentum. However, we believe that the valuations of many quality mid-caps seem to be attractive now, which may attract more interest hereon.
Do you think IT space is a good buying opportunity at current levels? If yes, which stocks are good and which ones should be avoided?
We believe one should be selective on IT stocks at the current levels in light of near-term headwinds in the form of trade wars, slower FY20 growth versus FY19, margin pressure points and skills shortage on digital. We prefer companies with greater revenue predictability along with healthy cash flow and cash return to shareholders. Among top-tier IT, we like TCS and HCL Technologies, while among mid-caps, we prefer Cyient and Sonata Software.
What is your view on midcap stocks? Which is your go-to stock right now?
While 1HCY19 was dominated by large caps or index stocks, quality midcap and small cap stocks are likely to be in flavour in 2HFY19. Notably, midcap and small-cap stocks have underperformed in 1HCY19 with Nifty Midcap 100 and Nifty Small indices declining by 1 percent and 3 percent, respectively.
We note that a number of quality names in midcap space, despite showing healthy numbers and holding strong growth potential, have not generated any meaningful return for the investors and hence current valuations are quite attractive and risk reward is quite favourable. Therefore, we believe a healthy return can be generated from mid-cap space in 2HCY19.
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