Sensex and Nifty may inch closer to their all-time highs by the end of this year, said Sandeep Bhardwaj, CEO, Retail, IIFL Securities in an interview with Kshitij Bhargava of FinancialExpress.com. He said that with the recent correction in the stock market, Dalal Street looks very attractive considering the long-term growth opportunity. He shared views on stocks that investors could buy for upside potential and has also listed sectors that can help shield investors’ portfolios amid the current volatility. Here are the edited excerpts.

FII selling has slowed down but they still remain net sellers, are you sensing a rebound anytime soon in their flows?

There are several types of investors within FII/FPIs. These include Pension funds – very long-term horizon (multi-decades), Hedge funds – very short-term horizon (3-6m), EM funds – buy/sell as basket including India ETFs – MSCI, FTSE. All these investors have different investment horizons, objectives, and strategies for investment.  Because so many investors are involved, they rarely act in unison. To assume that all the FPIs are selling at the same time and exiting India is too dramatic. The provisional data released every evening does NOT represent the actual net FPI flows into India. This only includes the NET inflows into secondary markets as reported by the custodians to SEBI. Coming to the selling figure, since the last few days there has been some reduction in selling from the FIIs and they were even net buyers on 30th May after a gap of 1 month. This might be due to selling fatigue after continuous selling for the last 8 months. Nifty 50 had corrected 16% from the highs and is now down just 11%, indicating strong outperformance compared to the global market. The selling from the FIIs has been absorbed by the DII and the retail investors and with the correction, the Indian market looks very attractive considering the long-term growth opportunity. Though it is too early to conclude, we believe a rebound by the FII is around the corner.

What are your end targets for Sensex and Nifty?

With Nifty trading at @16628 levels, its FY23(e) EPS is expected to grow by 15.7% and rise to 842. This would place the Nifty at ~18000 levels at year-end, while the Sensex is expected to be at ~61000 levels.  

Interest rates have started going up, what sectors or stocks stand at risk amid a rising interest rate environment?

Metals: Slowing exports from India and, hence, better steel availability domestically combined with sluggish demand have driven the ~Rs6,000/t drop in steel prices from the recent peak. This, along with elevated coking coal prices and higher iron ore prices, will hurt spreads. However, profitability remains above historical levels. We expect prices to remain subdued as we enter the lean season. Rising Chinese steel production, even as the real estate sector continues to be weak, could drive exports and lower steel prices. We remain cautious in the near term in the metal sector. As interest rates rise, all the companies thriving on growth at any cost strategies would struggle as the investors would be looking for safe havens with stable cash flow generation companies.

To beat the ongoing volatility in stock markets, what pockets can provide comfort to investors?

Banks: Banks continued to report healthy performance in 4QFY22, with good QoQ pick-up in loan growth, largely stable margins, and continued improvement in asset quality. Operating expenses continue to be elevated with increasing branch network and pick-up in SME/Retail disbursements. Hardening of interest rates led to lower trading gains and earnings cuts. Overall NII and core PPoP grew 16% and 20% YoY, respectively. However, PAT witnessed 56% YoY growth, driven by lower credit costs. Annualized credit costs for large private banks and SBIN stood less than or equal to 1.1%. After the healthy upgrades in 2/3QFY22, earnings have been largely maintained or cut for a few banks due to lower trading gains. Banks continue to hold large contingency provisions, and reversals of the same in ensuing quarters are not ruled out. Going forward, banks should gain from continued growth revival, the benefit of rate hikes, operating leverage, and benign credit cost. High competitive pressures on incremental business and the volatile macro environment remain the key risks. Our top ideas among banks are HDFCB, ICICIBC, and SBIN.

Fertilizer: The Government of India has increased Nutrient Based Subsidy (NBS) rates for the upcoming Kharif season to shield farmers from sharp increases in fertilizer input costs. The increased subsidy rates should keep DAP prices largely unchanged versus Rabi-2020, but NPK prices will likely still rise by 10-20%. Hence, some NPK demand may shift towards urea and DAP. The government has allocated an additional budget of ~Rs148bn for this increase in subsidy. Overall, this move is positive for nonurea fertilizer companies, whose volumes and margins will largely remain protected despite sharp increases in input costs.

Recent stock listings have not been too impressive. In May we saw 8 listings and half of the stocks that debuted were down with losses by the end of the month. What’s the reason behind the tepid sentiment there?

The markets have seen difficult times in the last few months and even the large caps have been badly battered.  During such difficult times, investors tend to reduce their investments in riskier bets and instead invest in large caps during the fag end of the bearish cycle. IPOs have seen a tepid response as they do not have a track record of stock performance. However, investors would have made money even during these difficult times if they had been selective in their IPO Investment. For example, IIFL had given a buy on 6 IPOs out of which 5 have been positive giving an average gain of ~17%.

How are midcap and smallcap stocks looking for the next few quarters as we continue to stare at multiple headwinds?

We believe one should not look at the Midcap and smallcap space only through an index perspective. We expect very stock-specific movement in the Mid and smallcap space for the next few quarters as rising interest rates would have an impact on the margins of most companies. Yet, several companies are looking attractive from a valuation perspective.

Cummins: While export markets are rebounding from multi-year lows, domestic order remains strong across DC, manufacturing, construction & realty.  Expansion of the domestic product portfolio (incl alternate fuels), new electrification-linked products for railways & ramp-up in exports will aid growth, while various cost actions will ease OPM headwinds. We expect the stock to reach a target of 1170 in the 12-month period.

Quess Corp: We retain a positive stance on the stock with a 12-month target of Rs 830, based on growth prospects, improving key financial metrics (ex-emerging businesses), and potential for value-unlocking at Monster, Qjobs, etc.

Deepak Nitrite: The company reported a steady quarter despite input cost pressures and a QoQ moderation in Phenolics spreads. However, Basic Intermediates and Fine & Specialty Chemical margins have recovered.  Capacity addition in Fine & Specialty Chemicals (with a CAPEX of >Rs3.5bn) and phenolic derivatives (Capex of Rs7bn), along with any margin recovery, should drive earnings growth over FY23-25. We consider the recent correction a good opportunity to accumulate the stock for a 12-month target of Rs 2400.