Midcap IT stocks better pick than large ones, says Dhiraj Relli of HDFC Securities

Dhiraj Relli, managing director and chief executive officer of HDFC Securities, speaks about earnings growth in the next quarters, present market scenario, the impact of elections and Nifty target in conversation with Ahana Chatterjee.

Where do you see Nifty at the end of the year?

Our target for Nifty was 11800 at the beginning of the year. We reached 11400 odd levels and from there it has corrected. I am still optimistic that Nifty will be again between 11400 and 11800 in March-April.

The broader market has seen a good amount of correction this year. Do you think it will perform well next year?

The midcap valuations have corrected significantly. From touching almost all-time highs in last December and in January and February, we have seen significant corrections in both the midcap and smallcap indices. The earnings growth in the broader market is also decent. I think the broader market will do better in the coming days, but the corporate banks will also do better because they have recognised the non-performing assets (NPA) and are looking for resolutions now. Quality midcaps should do well.

Which sectors do you see doing well?

Corporate banks should do well. We believe that information technology and services, select pharmaceutical stocks will perform better as they have corrected significantly. Also, the consumption sector has been a secular growth story in India. So consumer durables and FMCG will do well.

More than the sectors, I would say this market is more for stock pickers. Select companies will continue to do well. There are opportunities in both large and small-caps.

Since the last few months, the pharmaceutical companies are getting US FDA approvals. Do you think this is going to add value to the sector?

This sector has been struggling with a lot of issues for the last three years. Many companies were stuck with FDA approvals. Many of them figured things out, and now they are getting approvals. We will see these companies doing well in the coming days. So as they have not grown in the last three-four years and corrected significantly, they will be the beneficiaries in the near term. From this fiscal their earnings growth will be better than the last, and the next year it will be even better.

With rupee depreciating, what is your expectation from the IT sector?

The IT companies which have forayed more into the digital space and re-skilled their workforce will see a double-digit growth in dollar terms. It is more so for the midcap IT companies because the large-cap IT firms will see difficulty in showing double-digit growth in dollar terms. Rupee depreciation has a very limited role for the IT companies, though the future contracts get negotiated at these levels only, and most of it is already hedged.

We saw merger of three big PSU banks this year. We might see more mergers in the coming days, how do you think this is going to help the bad loan situation?

I think consolidation in the PSU bank sector is good for the industry. Suppose three different banks had given a loan to the same borrower. When they get merged, it can be handled better as a bigger entity.

What are the challenges for the market right now?

In the near term, I think the outcome of the elections. The process of the elections itself is a bigger challenge. This could lead to volatility. The brokerage houses started with a consensus of 23-24% earnings growth and now the second quarter was muted. So this can be a big concern for the markets. If we see any kind of compromise in the third and fourth quarters in terms of earnings growth and if the earnings growth continues to be single-digit for the rest of the fiscal, then it would have larger ramification for the market. We can see a significant correction then.