‘Quality mid-, small-caps should continue to do well’
Sectors which are beneficiary of the capex revival are likely to outperform in the medium to long term,
LAV CHATURVEDI, ED & CEO of Reliance Securities, tells Ashley Coutinho in an interview. Edited excerpts:
The market has seen bouts of volatility over the past few days. What are the risks for the market this year?
While the Indian economy started witnessing momentum after a sharp fall in economic activities induced by the pandemic last year, the second wave of Covid-19 cases and enhanced mobility restrictions imposed by several states have cast a shadow on the recovery phase. The market is still predicting that the impact of the second wave of Covid-19 cases won’t as severe as last year. Any prolonged economic restriction by large states beyond June and the further spread of Covid-19 cases in the hinterland, where the health care system is not up to the mark, can be the biggest risk to the domestic economy and equities.
What is your take on current valuations?
The Nifty currently trades at 23x one-year forward earnings, which is over 25 per cent premium to its long-term average. Further, on the market cap to GDP parameter, India is trading above 100 per cent as of now, mainly due to contraction in GDP last year. However, the spread between government security yield and Nifty earnings yield is still 110 basis points (bps), which is quite low compared to the long-term average of 185 bps and, therefore, we believe equity class is expected to remain a preferred investment option.
How do you assess corporate earnings in Q4?
Notwithstanding cost inflation, Q4FY21 earnings growth is expected to be strong considering the low base of last year and a sharp demand recovery with improved capacity utilisations. While it is still premature to compare the actual performance of Nifty50 companies because only a few companies of the Nifty50 have declared their Q4FY21 performance as of last week, the profit of these companies recorded average growth of 25 per cent. In our view, higher capacity utilisation can potentially negate the sharp rise in input and freight costs to an extent. However, results of heavyweight financials/bfsis are expected to be crucial for overall Q4 earnings growth of Nifty50 companies, given the recent order by the Supreme Court.
Do you see the outperformance of broader markets continue?
The outperformance of mid-caps and small-caps was mainly on account of improved earnings visibility of corporate India. As valuations of large-caps appeared to be out of whack, investors started lapping up quality mid-caps and small-caps, which were available at relatively comfortable valuations. As we still believe that a corporate earnings recovery is very much on the cards, quality mid-caps and small-caps should continue to do well in the medium to long term.
Which sectors are you betting on in the coming months?
A low-interest rate scenario in the last two years has certainly benefited rate-sensitive sectors. This has also aided the real estate market to see a sharp volume increase in recent months. Additionally, the strong pricing scenario and the uptick in demand globally aided metal stocks. Further, the announcement of a sharp increase in capital expenditures in the Union Budget fuelled a rally in infrastructure, cement, industrials, and capital goods. We believe sectors, which are beneficiaries of the capex revival, are likely to outperform from a medium-tolong-term perspective.
What is your take on banking and NBFC stocks? Is the sector out of the woods yet?
We believe prolonged mobility and economic restrictions in states can adversely impact the growth trajectory of banks and NBFCS in the medium term. The sharp rise in daily caseload and wider economic restrictions by several states again have posed risks to the asset quality of unsecured personal/mfi/consumer durable and even MSME loans. We believe these statewide lockdowns/night curfews to ease by May end. However, any such disruptions in economic activity always have a cascading effect in the subsequent months. This will impact both credit growth and asset quality assumptions for retail banking and NBFCS.
What are the key trends you see emerging in FY22 for the broking industry?
A record increase in new clients onboarding and robust average daily turnover (ADTO) benefitted the broking industry during FY21. Given the cyclical nature of the broking business, along with the high base, market volatility, and phased implementation of new margin regulations, one can expect some tapering-off in the industry’s growth in FY22E. However, we still believe digital adoption and continued emphasis on improvising operating efficiencies can surprise all on the margins front. In our view, the industry is clearly shifting its focus from volumes to the number of trades, which may prompt brokers to target more customers onboarding and activation.