‘Flight to safety and quality has been investment mantra’

As the markets usher in Samvat 2076 with a hope that the economy will turn for the better and corporate earnings will improve, NIRMAL JAIN, chairman, IIFL, tells Puneet Wadhwa that picking right stocks and sectors will be important. Foreign portfolio investors (FPIS), he says, remain ‘neutral’ on India and that he does not expect any material change in their flows for now. Edited excerpts:

What’s your interpretation of how the markets and economy have shaped up in the past one year?

Flight to safety and quality has been the investment mantra in the past year. This is understandable given the slowdown in the global and the Indian economies, corporate governance and promoter pledge-related issues, continuing stress in the luxury real estate, issues with non-banking financial companies (NBFCS) and the sharp divergence in earnings momentum between the defensive and the cyclical sectors. I think that the worst of the economic slowdown is behind us. Higher rural income should have a multiplier impact and consumption growth is set to accelerate. A cut/rejig in personal tax rates will undoubtedly revive consumption demand. The Reserve Bank of India (RBI) has proactively been cutting interest rates and the recent steps taken by the government will help in the long run.

Your market outlook for Samvat 2076?

At least in the near term — for the next three months or so — it will perhaps be ‘more of the same’. High quality defensive large - cap stocks will continue to outperform. However, this needs to be closely watched. As and when the growth momentum improves, the oversold domestic cyclical stocks will ratchet up. It is hard to predict when this

reversal will happen, but I reckon it should happen in the latter part of Samvat 2076. I do expect the government to come up with new measures to boost growth. Fast-moving consumer goods ( FMCG) and highquality financials, including life/general insurance companies, remain our favourites. In general, the markets will likely remain bottom-up rather than top-down. Hence, picking right stocks and sectors will be more important.

How are investors reading these developments?

Most retail investors have not earned very well in the stock markets as they tend to invest in mid- and small-caps. However, the good news is that they are now investing through systematic investment plans (SIPS) of mutual funds. At this stage, domestic retail and institutional flows continue to remain positive and they will remain net buyers. Foreign portfolio investors (FPIS) are neutral on India and we don’t expect any material change in their flows for now.

How have the last few months been for NBFCS?

The situation has been improving with a number of significant steps being taken by the RBI and the government. I would say the world of NBFCS is divided into two parts — the wholesale-dominated NBFCS and the retail-dominated ones. Most wholesale-dominated NBFCS had significant exposure to real estate developers and they are finding it difficult to refinance their assets or meet repayment obligations, as funding lines from mutual funds and banks have almost dried. However, they are looking at private equity (PE) and distribution of highyielding debt instruments to high net worth (HNI) investors. The retail NBFCS have been able to assign assets and the banks have been very cooperative in buying these assets. In a way, this is a win-win for retail NBFCS and banks. Many NBFCS have also been able to successfully raise resources from overseas markets. Of late, banks have started distributing term loans. Like in any structural turbulence, there is a shakeout, and the stronger player survives and those who survive have a brighter path ahead.

Your estimates for corporate earnings growth for FY20?

For the Nifty, our current estimates suggest 21 per cent year-on-year (y-o-y) growth in FY20 earnings and 17 per cent y-o-y growth in FY21. Large corporate banks are relatively better positioned on the asset quality side. Private banks in general, especially the larger ones, continue to gain market share and will continue to do well. Insurance companies have seen an acceleration in growth and profitability, and they will also continue to do well. Most NBFCS have corrected the asset-liability mismatches, and have moderated growth, and thus are now better positioned.

How has the reorganisation strategy worked out for you?

It took a little longer than expected to get regulatory approvals for the listing, but now everything is done and there are three separate listed businesses. One more process is the merging of the NBFC subsidiary into the listed IIFL Finance, which is expected to happen soon. The strategy has worked well for us as the three businesses have attracted different sets of investors. That said, all the three businesses are part of the financial services industry and, therefore, dependent on overall economic growth and penetration of financial products.

ON THE ECONOMIC SLOWDOWN, I DO THINK THAT THE WORST IS BEHIND US. HOWEVER, HIGHER RURAL INCOME SHOULD HAVE A MULTIPLIER IMPACT AND CONSUMPTION GROWTH IS SET TO ACCELERATE. THE RBI HAS PROACTIVELY BEEN CUTTING INTEREST RATES AND THE RECENT STEPS TAKEN BY THE GOVERNMENT WILL DEFINITELY HELP OVER THE LONG RUN