The Nifty Mid-cap 100 P/E ratio now trades at ~15-17% discount to large-caps, but given the uncertain times, we would suggest investors to largely stay with quality large-caps while mid-caps may be looked upon on a selective basis, Siddharth Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd, said in an interview with Moneycontrol’s Kshitij Anand.
Q) We are back above 10,200 levels, but is facing some resistance above 10300-10500 levels. What led to the rally on D-Street in the week gone by despite negative news related to COVID, Fitch rating, and the India-China border dispute?
A) Indian equity markets ended last week with strong gains, largely led by positive global cues and rally in the banking and financial stocks. The market ignored the potential fallout of geopolitical tensions and the rising number of virus infections.
It resumed cheering a gradual resumption in business activities and an earlier-than-expected normalization in certain consumption sectors.
During the week gone by, global markets consolidated for some time due to jump in coronavirus in the US and resurgence of cases in China, raising fears of the return on lockdowns.
However, post the US Fed’s launch of a massive program under which it announced buying of USD 750 billion in corporate bonds to support businesses, it lifted the markets again.
On the domestic front, the Supreme Court ruled out the possibility of a complete interest waiver during the moratorium period. It deferred the plea to consider waiver of interest on interest for loan EMI during six months moratorium period.
Further SC in the telecom AGR ruling provided a respite to the exposed banks by allowing the DoT time till the third week of July to consider the telcos proposal and formulate a scheme for payment of the dues in a phased manner.
Even Index heavyweight, Reliance pulled the market up by surging to its record high after it became net-debt free due to a record Rs 1.69 lakh crore fundraising in under two months.
Q) What are the important levels which investors should watch out for in this week which is also an expiry week?
A) The index has been moving in a rising channel on a daily scale by connecting swing lows of 7511, 9004, and 9544 and 9845 marks, and recently it has turned from its support zones withhold of 50-Days EMA.
We witnessed a follow up buying post a breakout from a Triangle pattern which indicates that momentum may continue. RSI also turned northwards and gave positive crossover with its average, which has a bullish implication.
Now, the way many heavyweights like Reliance, Bajaj Finance, HDFC Bank are contributing, the index has the potential to extend its move towards 10500 then 10800 zone, while support is now shifting higher to psychological 10000 levels.
Q) The big news of Friday was RIL which has become debt-free and proposes to list Jio and Retail business in the next 5 years. What is your view and do you think it warrants for a rerating of the stock?
A) Reliance Industries became the first Indian company to cross Rs11lakh crore in market cap on Friday after it declared itself net debt-free, nearly nine months ahead of schedule. The decline in overall debt is a major factor, can lead to the next leg of the rerating of the stock.
Overall, the company has raised more than Rs1.68 lakh crore in two months since April. The fund-raising included the rights issue of Rs53,124 crore and Rs 1,15,694 crore raised through a series of secondary stake sale in Jio Platforms to a variety of global investors ranging from a global network media leader (Facebook), private equity and global investment firm (Silver Lake, General Atlantic, KKR, TPG) and sovereign wealth funds (Abu Dhabi’s Mubadala and Saudi Arabia’s Public Investment Fund).
Not only does this reaffirm Jio’s potential transformation as a technology giant in the eyes of global investors, it also helped in RIL’s goal of reaching its net-zero debt goal at a faster clip. RJio’s dominant position should allow it to garner strong consistent growth over the long term.
We are positive on RJio’s multiple monetization avenues coming from increasing long-term ARPUs and other digital applications with the Facebook deal. Reliance Retail too has maintained robust performance amidst a slowing economy.
Its grocery segment is likely to support revenues during the lockdown phase and its strategic venture with Facebook to connect local kirana stores should provide synergies and scale its online business further.
Q) Small & midcaps outperform benchmark indices in the week gone by. Is it the valuation that is fueling optimism in the small & midcaps space?
A) Last week, while Nifty50 gained 2.7%, Nifty Midcap100/ Smallcap100 were up 1.6%/4.2% respectively. Mid and Smallcaps have equally participated in the market rally along with the larger benchmark over the last few weeks.
While Nifty has recovered 36 percent from its March lows, the Nifty Midcap index is up 35 percent and the Nifty Smallcap Index is up 43 percent.
We have seen increased market interest in Mid/small caps in the last few days as market optimism increased over the gradual reopening and faster than expected recovery in the economy.
Management commentaries from various companies across sectors are pointing out towards a pent-up demand which at least takes care of the near term.
The Mid/small caps have been underperforming the larger peers over the last 2 years. The Nifty Mid-cap 100 P/E ratio now trades at ~15-17% discount to large-caps.
However, given the uncertain times, markets are likely to remain volatile. Hence, we would suggest investors to largely stay with quality large-caps while mid-caps may be looked upon on a selective basis.
Q) What is your call on the telecom space post the SC AGR hearing? Banking and financial stocks saw a big boost on Thursday. What are your views?
A) View on telecom remains positive as we believe that the system recognizes the strategic significance of the sector. Also, we believe that Vodafone Idea needs to survive, and India cannot be a two-player telecom market, as it would result in an extended effect on other sectors such as Banking, telecom vendors, technology partners, and others.
Marquee global technology giants, PE investors, and sovereign funds are confident of the Indian Technology-Telecom sector. This can be observed from ~INR1.2t in inflows into RJio and further news of Amazon & Alphabet eyeing stake in Bharti Airtel and VIL, respectively.
Deferring the hearing to the third week of July’20, the Supreme Court asked telcos to create a proposal to either make a reasonable upfront payment or furnish undertakings to claim the benefit of staggered payments.
Further, the Supreme Court also allowed time for the DoT to consider the operators’ fresh proposal. With regard to the timelines, both telcos have sought 20 years to make the repayment.
The biggest positive was that the SC took cognizance of VIL’s statement that it did not have the means to make additional bank guarantees and would be compelled to shut shop, witnessing major repercussions if asked to pay immediately. However, the SC seems unrelenting and determined to not concede without any concrete plan.
We believe another tariff hike is inevitable, driven by VIL’s need for survival, the stressed balance sheets of the telcos, and an increase in the sector’s importance due to the current crisis. Given both BHARTI and RJio’s better cashflow positions, these companies could see a strong benefits from the potential tariff hikes.
On the banking front, the Supreme Court has ruled out the possibility of a complete waiver of interest during the moratorium period and added that the scope of the hearing is limited to the waiver of interest, which is levied on the accrued interest.
The government has further stated that it would hold a meeting of the stakeholders (including the RBI, banks, and the Finance Ministry) this weekend to arrive at a response and would submit it to the SC by 17th Jun’20.
This comes as a sign of relief to the banking system, which otherwise would have faced significant operating losses coupled with triggered capital calls across banks. Loan waivers in the past have impacted credit behaviour and to that extent any decision against it is positive. Within the banking space, we continue to maintain our preference for ICICI Bank, HDFC Bank, and SBI.
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Published at Wed, 24 Jun 2020 06:53:01 +0000-Nifty Midcap 100 P/E now at 15-17% discount to largecaps; where to put money?