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High valuations will cap the upside: Gautam Duggad of Motilal Oswal

08 May 18 | 12:00 AM

High valuations, particularly in the mid-cap space, will limit the upside for the markets, says Gautam Duggad, head of research, Motilal Oswal Institutional Equities. In an interview with Samie Modak, Duggad also says rural-focused stocks can be a good play in an election year. Edited excerpts:

How has the earnings season panned out so far?

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So far the earnings season has been in line with the estimates, excluding the Axis Bank, which reported a significant rise in provisions and slippages. We expect corporate-oriented banks to report muted and volatile asset quality. We would advocate that investors, who look at aggregate numbers, exclude banks to get a better grip on corporate profitability trends. Information technology (IT) and private financials have largely met our estimates. The cement sector has surprised on the upside, thanks to better-than-expected realisations. Auto companies have posted strong volume growth, but their margins have been subpar, given the elevated promotional spends and higher raw material costs. Among the consumer companies, which reported their numbers so far, rural growth is clearly outperforming urban growth, a trend we have been advocating for the last couple of quarters now.

Will India Inc meet the consensus earnings growth forecast for 2018-19?

It is tough to forecast, at this juncture, whether consensus estimates will be met for 2018-19. However, we believe earnings, this fiscal, will be substantially better than the previous fiscal. We expect asset quality in public sector banks (PSUs) and private banks to improve in the next quarter.

In April, there was a cut in consensus earnings estimates, while the market rallies six per cent. Valuations are once again above long-term averages. Do you think high valuations will cap upside? Valuations cannot be considered on a month-to-month basis. April rally of 6 per cent was after a correction of 10 per cent in the previous two months. Indeed, valuations are not cheap. The mid-cap valuations are trading at an unsustainable premium to large-caps. We maintain our cautious stance on mid-caps. We do believe that high valuations will cap upside at an index level, unless accompanied by earnings surprises. However, there are still enough bottom-up opportunities in this market.

Key triggers for the market?

Politics will be one of the most important triggers till mid-2019. This coupled with the progress of monsoons, the announcement of minimum support prices , global oil prices, continued macro recovery will be the other important triggers in the near-term.

Do you expect the markets to be more volatile this year compared to 2017?

Yes, given the election-heavy year.

How will the Karnataka election outcome play on the market?

BJP's victory with a full majority will provide confidence to the market and will augur well for short-term market trends. On the other hand, BJP's defeat can make the market nervous and uncertain for the 2019 outcome and can induce short-term correction and elevated volatility.

Are there any themes around good monsoon forecast for this year?

The consumption recovery theme continues to remain intact. In an election year, we expect the government to be accommodative and indulgent towards rural consumption. Autos, consumer discretionary, non-banking finance companies (NBFCs), consumer staples are some of the sectors which fit into above themes.

Which are the sectors you are very bullish or very negative on?

We are bullish on private financials, consumption, autos and select midcap plays. We remain cautious on metals, cement, telecom, pharma and IT. We would advise investors to focus on good quality companies with earnings visibility.

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Company Price Gain (%)
H D F C2,338.002.26
Kotak Mah. Bank1,537.600.31
HDFC Bank2,403.900.26
Bajaj Fin.3,466.350.14


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