Bullish on these two themes for 2019: Vipul Prasad, Magadh Capital

The defensives or select largecaps can continue to do well in 2019 while smallcaps and midcaps and some of higher beta sectors may continue to underperform, Vipul Prasad, Founder & CEO, Magadh Capital LLP, tells ET Now. Consumer staples and metals, specially auto are his favourite themes this year.

Edited excerpts:

What makes you think that metals are at an attractive valuation? What parameters are you seeing? Also, any preferred names to invest in?

In metals, if one looks at the price to book valuation metrics, in some of the stocks we are trading at multi-year lows. If you take that in the context of metal price trends, like if we look at the prices in steel and aluminium, probably we will realise that we are in early to mid level of the price cycle.

That means we should not be expecting too much of a decline in steel or aluminium prices incrementally. But the kind of valuations Steel Authority is trading at -- 0.5 times price to book -- has been rarely traded at and not unless there is call that there is going to be book value erosion. That is highly unlikely. In fact, it looks like the market is building in a significant price decline from here also. That is why it looks quite attractive.

But having said that, it does not look like it is going to be a rebound immediately. One has to have some patience and one more thing, it is not that the entire sector will be lifted in terms of pricing as there is no tailwind. Even from a regulatory perspective, I do not think the entire sector will benefit from some big regulatory dole-out.

In that sense, SAIL looks good. Even NALCO looks very interesting because they are getting some volume growth and their cost is very much under control. Their balance sheet is very strong. These two stocks look good.

What is your take on the markets currently?

I would say lots of top-down drivers are taking centrestage right now. The way to look at the markets should be in over three timelines; first is obviously what happens between now and the elections. The second is probably the second half of 2019 and then we invest with a two, three-year perspective.

Till the elections or rather till first half of 2019, the markets are going to be quite volatile and I will not be surprised if they end up where they started.

Basically between 30th June and 1st of January, probably there is not going to be too much of a difference in the market levels.

As for the key drivers, the first one obviously is what is going to happen in the elections. So, every 15 days will come up with some new angles, new ideas and some new expectations that will keep everyone on the edge.

Second, even the global economic situation is showing some signs of softening and that also may keep the markets range-bound at best. At the same time, we are going to see earnings not going up at too high a pace and with all these top-down drivers which are not looking too great, probably earnings multiples may come down further. These are the things that may keep it under control in the next six months, not much to expect from here honestly.

One more thing worth highlighting would be that probably it is going to be a replica of what we saw in 2018. The defensives or select largecaps can continue to do well while the smallcaps and midcaps and some of higher beta sectors may continue to underperform.

If we are able to look slightly longer, in the second half of 2019, I will be more constructive because the first thing is that the political uncertainty will obviously be over and at the same time, we will have a better visibility on Fed rate trajectory because that has been a big driver of liquidity.

We should be seeing a peaking out of Fed rate by late 2019. One more thing would be that in the last say 12-18 months overall, we have seen lots of stress in the entire banking system and at some point in time, corporate banks and NBFCs. By late 2019, the banking system should be in a much healthier shape and in a position to start financing the next round of private capex that is likely to begin say late 2019, early 2020.

All these thing make us slightly positive on 2019. Probably late single-digit return percentage should be seen in the second half. If we are able to take a step back and take a longer-term view, let us say two, three-year perspective, the first thing that would come to the mind would be that whatever happened in 2018 should be taken more as a pause in the longer bull market that started in 2009.

What are some of the top themes that you are advocating to clients or are bullish on?

The first one is rising disposable incomes. Consumer staples look very interesting in that count. Apart from rising disposable incomes, the rural economy is getting strengthened and that also is a strong theme. Obviously, volume growth is picking up and will continue to do so. In that sense, some of the FMCG stocks look quite promising even though they are slightly on the higher side on the valuation multiples, but still effectively one is paying for the quality and one is paying for the clarity on the three, four-year earnings growth.

So, even if there is no further rerating from here, at least they are not going to be derated. If they are able to say deliver earnings growth of 18-20% per annum or even 15-18% per annum, then four years from now, you will see them doubling from here. That is a good theme in my view.

Another one would be slightly beaten down sectors like metals or particularly autos. The 2018 Nifty Auto index was down by almost 23%. It was highly cyclical in nature. It may be a couple of quarters before some of the leaders start seeing sizable rebound in their volumes. And that will be probably be driven more by longer-term trends like improving road networks, rising aspirations, very low penetration of automobiles in India or maybe even shrinking size of families.

All these are pointing towards a sustained period of high volume growth for some of these companies which have the commitment that is required to stay and win in this market and those that have created a kind of a distribution network that is required for that.

Some leaders who are planning to launch many more models than they have done in the last 12-18 months, probably can see a sizable volume growth.