Where will Sensex, Nifty peak this year? Look at recent tops to find where share market is stuck | INTERVIEW

BSE Sensex and NSE Nifty 50 have been oscillating between gains and losses for the last few sessions; the benchmark indices snapped two-week gaining streak to close nearly 4 per cent down last week. Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, believes that the Nifty 50’s recent top of 11,600 and BSE Sensex’ 40,000 could be the peak for this calendar year. In an interview with Surbhi Jain of Financial Express Online, Rusmik Oza lists out a host of factors such as rising COVID-19 cases, upcoming US Presidential elections, and untoward outcome of US-China trade war, which may dent the investor sentiment. He also expects that in the absence of any major domestic trigger Indian share markets could mimic the global trend. On the sectoral front, as BSE IT index has rallied 80 per cent its March low as compared to a 47 per cent rise in Nifty 50 index, Rusmik Oza sees IT sector as a defensive sector in any near term correction.

1. With Sensex below 38,000 and Nifty below 11,200, is there further correction on the cards?

Both Sensex and Nifty 50 touched their 200 DMA placed at 10,757 & 36565, respectively and have bounced back from those levels. However, the formation of both the Nasdaq Composite Index and S&P 500 is looking very weak as there has been a breakdown in both. The entire global rally was driven by Big Tech stocks that drove Nasdaq and S&P 500. If we don’t see an immediate pullback in these two US indices then Nasdaq can potentially correct another 12% and the S&P 500 by fall by another 6%. In the absence of any major domestic trigger, our markets could mimic the global trend. If the US markets correct further then Nifty-50 can test its 200 WMA placed at ~10,550 levels. For the time being, Nifty 50 seems to have taken support at ~10,800 levels or may take support ~10,550 in case of any further correction.

2. People who have been waiting to enter stock markets should wait for some more time? Where is this correction headed?

From a valuation perspective the developed markets and Indian markets, both are in the rich zone. The Nifty 50 is trading at 19.9x on one-year forward basis as per Bloomberg consensus estimates and 20.5x on our in house earnings estimates. As we go ahead the Fw PE will keep coming down as more months of FY22 get captured in future estimates. We would be more comfortable assigning a Fw PE of 18-19x as our valuation benchmark. This means the market is still not in the comfort or attractive zone. It is ideal to have an accumulation strategy at every decline in the next few months as we don’t know how impactful the second wave of Covid-19 could be in different parts of the world.

3. The IT sector has been gaining attention these days, what are your preferred stocks from this sector?

Last week HCL Technologies provided a mid-quarter update. It guided for higher revenue growth and EBITDA margins for this quarter as compared to its earlier guidance. The strong margin guidance is a positive surprise and this had a positive rub-off effect on the sector. The intent of higher spending by clients will likely result in corresponding opportunities for IT services companies. We expect the good conversion of pipeline to deals and support close to 10% growth for many IT companies in FY22. From 52 week low, the BSE IT Index is up 80% as compared to 47% for Nifty-50. We still see single-digit upside in the BSE IT Index. The IT sector could also be seen as a defensive sector in any near term correction. We are constructive on IT services space with Infosys, Tech Mahindra and HCL Tech as our top picks

4. What are your views on PSUs as a sector?

In this calendar year to date, the BSE PSU Index is down 37% as compared to 12% fall in Nifty-50. Prior to this even in the calendar year 2019 the BSE PSU Index had corrected by 6% when the Nifty-50 had gone up by 10%. The gross underperformance could be due to a continuous supply of paper by way of follow on public offerings and divestment through Bharat ETFs. On an Fw PE basis, the BSE PSU Index peaked at 13x in 2017 and since then it has seen continuous derating. As of now when the Nifty-50 is trading at peak valuations of ~20x on Fw basis the BSE PSU Index is trading at 6.6x. The valuations of BSE PSU Index is closer to its 10-year low range of 5-6x on Fw basis. Somewhere the RoEs of PSU stocks have been coming off but still looks quite healthy from an FY22 perspective. The dividend yield of BSE PSU Index works to 5-6% for the next two years, which looks very attractive. Considering decent RoEs, high dividend yield and attractive Fw PE of ~6.6x the entire pack of PSU stocks looks very attractive.

5. Where do you see BSE Sensex and Nifty 50 by year-end? What are the key risks going ahead?

The recent top of ~11,600 on the Nifty-50 and 40,000 on the BSE Sensex could be the peak for this calendar year. These peaks were formed in a euphoric situation with worldwide heavy participation by retail investors. As the number of cases of coronavirus is again increasing and we are now approaching winter it would not be wise to expect world markets to break-out into a new zone, at least in this calendar year. The forthcoming US Presidential elections, steep rise in Covid-19 cases and untoward outcome of US-China trade war are the key risks to global markets. In India, any delay in economic recovery and consequent delay in demand could impact earnings and to that extent, valuations could further go up.

6. Do you think the gold dream run has stopped after hitting record high? Is it the right time to buy gold?

Gold seems to be in a correction phase after again falling below its 2011 high of US$ 1920/ounce. On the contrary, the Dollar Index has taken support at 92 level and is most probably heading for ~97 mark. In this background, the international price of Gold can fall further to ~US$ 1700/ounce. One can look to add Gold in declines rather than buy at one go. Since the March low of ~US$ 1450/ounce, gold had rallied by 41% to US$2050 in a matter of five months. Similar to the Big Tech stocks in the US Gold was also extremely overbought above US$2000/ounce. Hence, the correction could be a healthy sign. One can look to buy gold in every decline.