In this Q&A with Outlook Business, Harendra Kumar, head of institutional equities at Elara Capital offers his take on the current market, the impact of Elections 2019 and discloses his best pick for 2019. For investing insights, follow @outlookbusiness (https://twitter.com/outlookbusiness ) and log on to https://www.outlookbusiness.com/
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00:00 Fundamentally, I think the markets are at a very, very crucial juncture.
00:11 So we're coming through a huge earning deceleration cycle where earnings were flattish or did
00:16 not grow.
00:17 I think for the first time this year, we're going to end with double digit earnings growth
00:20 for the Nifty.
00:22 And from here to the next three years, you're compounding of 23% and earnings doubling in
00:27 the next five years.
00:29 So which is very significant for a large market like India.
00:32 So I think that is one.
00:35 Earnings, the multiples are also reasonable.
00:38 Though headline P multiples could be slightly higher on a trailing basis, but there are
00:43 a lot of pockets of value that are existing in the markets now.
00:47 So fundamentally, we are very sweetly poised.
00:50 The risk to the market on the fundamentals is actually the continuity of the government.
00:55 Remember, the earnings of the Nifty are being driven by the banking stocks, which will be
01:00 coming out of a huge down cycle.
01:03 And people are anticipating and building position that the resolution in the banking system
01:08 will take place.
01:11 Profitability will return to the banks.
01:14 And that is going to drive the Nifty.
01:16 Secondly, also is that you had a problem with the NBFCs where there was a liquidity crunch.
01:21 I think this will also ease off and hence you're seeing a bounce trade which is currently
01:25 happening.
01:26 The second important point is all the cyclical industries like the real estate, the capital
01:33 goods cycle, we are seeing very nascent recoveries.
01:37 If there is a change in the incumbent government, this could get pushed out, which could be
01:41 a risk to the market.
01:43 So that is why I think a continuity at this juncture, more so in this election than the
01:49 previous one, is very important for the markets.
01:51 So, I think what the market is pricing as of today on the elections is clearly the incumbent
02:00 government coming back to power.
02:02 I think that is what you can see in terms of the risk aversion that actually was elevated
02:07 after the Madhya Pradesh and Rajasthan loss is actually coming off.
02:11 Frankly, there has been no change in the earnings numbers since then.
02:16 What was that the risk was elevated, now it's coming off and the market is re-weighting.
02:20 And that's why you see a lot of mid-caps which are moving up.
02:23 What the market is not pricing in as of now is a very large victory for the incumbent
02:28 government.
02:29 And why are we anticipating such a large victory for the government is that clearly this is
02:34 a presidential election and there is no viable alternative to the current incumbent Prime
02:38 Minister.
02:39 So, if the win is about 270 seats standalone BJP or 300 plus, I think the market will shift
02:49 orbits to beyond the new highs that it's posted today into something which is uncharted
02:57 territory as of now.
02:59 So, we are in interesting times.
03:02 Elections do matter and contrary to what people say that elections don't matter because the
03:05 policies are driven by inflation and inflation drives our nominal earnings and nominal earnings
03:13 drive our markets.
03:14 So, I think we are in for interesting times after these elections.
03:17 So, currently, if you ask from the countdown to now to the elections, I think, primarily
03:27 number one, the market is still circumspect about this rally.
03:31 I think that is the beauty which tells us that this is going to continue in the run-up
03:35 to the elections.
03:38 But are we going to chase what got beaten down?
03:40 Possibly no.
03:41 I think when you align yourself to such large changing facets of the market, you need to
03:48 probably anticipate what's going to rally in the next term of the government.
03:53 Remember that the first term was very socio-capitalist economy and probably India will shift gears
03:59 to a capitalist economy under the new incumbent government.
04:03 So, I would bet on high cyclical recovery stocks and would want to place my bets on
04:10 some of these new sectors which have been beaten down or ignored by the markets.
04:16 To name a few, of course, banks is number one out there.
04:20 Second is real estate and third would be possibly capital goods and infrastructure and maybe
04:27 even power utilities.
04:30 And this is very different from what ran in the last three to four years.
04:34 So, I think we look for opportunities out there and align our portfolio accordingly.
04:39 I think the sectors that will be vulnerable if the market sees a disappointment closer
04:44 to the elections will be one is the mid and small cap stocks.
04:48 They've seen a good risk-off trade which is helping them to post some gains.
04:53 There's some continuing momentum in these stocks.
04:56 I think that will halt.
04:57 Number two, of course, is the banks because the banks have been seeing renewed interest
05:03 and participation and clearly that trade will be off the table at least momentarily till
05:10 people try to reassess what's happening in the markets.
05:14 I think these are the two most vulnerable areas in the market if the results are not
05:18 as per expectations.
05:19 My pick for the year is Reliance Industries.
05:24 Remember that the company is coming out of a 10-year capex and its investments are aligned
05:29 to India's future generation.
05:32 Their telecom convergence or for that matter retail.
05:36 It is no longer a refinery company or a petroleum company.
05:40 Remember which is India's largest retailer?
05:42 It's Reliance.
05:43 Which is India's largest telecom player?
05:45 It is Reliance.
05:46 Which will be India's largest internet company?
05:48 It will be Reliance.
05:50 When this triple play comes into force, Reliance will be India's Alibaba.
05:55 And Alibaba trades at $300 billion market capitalization, whereas Reliance is only $100 billion.
06:02 To reach Alibaba's EBITDA numbers, possibly Reliance will take another five to six years
06:07 only.
06:08 But the journey in terms of its market cap implies 25% CAGR.
06:13 So I think for a large cap to deliver that kind of return is phenomenal.
06:18 And these are conservative estimates.
06:21 My imagination cannot fathom if it lists globally because it will be the only gateway to the
06:27 world for India's largest consumption market.
06:30 I think this context has not been appreciated by the market, which we can understand from
06:36 the under-ownership in the stock.
06:38 I think people should be constructively aligned to Reliance if they want to play India's next
06:45 demographic boom.
06:47 And there is no other company better placed than Reliance to capitalize that.
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