Stock prices have shown no signs of cooling even though the macro data is far from encouraging and companies are struggling with a slowdown due to demonetisation and the GST implementation.Pankaj Pandey, Head-Research, ICICI Direct, discusses the way forward for stocks and sectors. Excerpts:

Earnings for the June quarter have been very tepid. What is your target for Nifty EPS for FY18? Are you revising it lower?

We usually take a bottom-up approach. During Q1 FY18, the topline growth was around 5 per cent; the bottomline was almost flat. The growth was led by cyclicals such as metals and oil & gas. Earlier, we were expecting strong double-digit growth in FY18 and FY19 , but now we think growth will remain in single digits in FY18E, i.e., nearly 9 per cent, but there will be a good bump-up in FY19E, with earnings growth expected at about 23 per cent.

Won’t a downward revision of EPS growth cause forward PE multiple to shoot up? Most investors were factoring in 17-18 per cent earnings growth for FY18.

Historically, whenever there has been a sharp fall in interest rates and yield, we have witnessed an expansion in PE multiples. Between January 1999 and October 2003, the decline in yield was 6-odd per cent. During that time, the earnings multiple expanded to nearly 24x; earnings improvement fructified subsequently, and that is what we think will happen now. At this point in time, we are not witnessing any new devils. Improvement in earnings of banks, due to lower provisioning, will help boost Sensex earnings in FY19E.

But banks’credit growth is at multi-year lows...

Gone are the days when we had economic growth of 7-8 per cent and inflation of 7-8 per cent, translating into nominal growth of 14-16 per cent. PSU banks used to grow their credit by 17-18 per cent, private banks 5-6 percentage points higher than that, and smaller banks double of that. But that base has come down due to the fall in inflation. A normal growth in credit would be between 7 and 8 per cent. There is also credit substitution in the economy, with fund-raising also happening through other channels such as corporate bond issuances.

And it is not as if all the engines of the economy are firing now. Private capex has not picked up; nearly 99 per cent of capex is government-led. In the second half of the year, there could be some revival. Even in railways or defence, not much ordering is happening now, but it could pick up pace going ahead.

In which sectors do you see better growth going forward?

Consumption-oriented sectors such as autos and consumer durables will maintain the momentum in earnings. We also expect capex to pick up, which will help corporate banks and allied sectors such as cement, steel and infrastructure.

For instance, under the ‘Housing for all’ scheme, the government is targeting construction of about 6 crore houses by 2022; about 4.4 crore houses will be in rural areas. So far, nearly 32 lakh rural houses have been constructed. Tendering activity is at elevated levels and can help cement and steel companies.

Do you think it’s best to pare exposure to IT and pharma companies, given the structural headwinds?

We have lowered our exposure to IT and pharma. In IT, growth will remain in single digits for one or two years. From a valuation perspective, they might appear cheap: for example, Infosys, which was trading at around 17 times PE multiple, is now trading at about 13 times, Sun Pharma which was trading at about 26-27 times, is now trading around20 times. But currently, there is little visibility in growth, and till that happens, there is likely to be a time-based correction as the price-wise damage is largely done.

But stocks with good growth have seen a sharp run-up in prices, making them expensive. How comfortable are you investing in these?

We are not worried about a company’s valuation as long as it is growing strongly. It’s a stock-specific market. If the company is growing well, the market is comfortable with the stock. For example, Bajaj Finance looks comfortable growing at nearly 35-40 per cent.

Compared with global peers, the Indian market is very expensive, largely due to higher growth prospects. That is happening with domestic stocks and sectors as well. With ample domestic and foreign liquidity, valuation takes a backseat due to lack of viable alternatives.

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