Although the benchmark is ~25% below peak, it continues to price in a fairly optimistic scenario. The Nifty is trading near its long-term average on a 12 month forward PE basis, but the consensus estimates imply ~10% YoY growth in Nifty EPS, which is quite unrealistic, in our view. Hence, we do not see a lot of upside in equities from current levels. That said, the sector leadership in equities is also shifting and sectors like pharma, telecom and insurance should do well. The 1QFY21 earnings may not surprise investors as companies are generally expected to report extremely weak numbers, however, the duration of the slowdown could surprise equity markets as the markets seem optimistic on the recovery path.
What’s the mood among the retail investors now? Are they feeling left out after the rally from March 2020 lows? Do you see an increased participation over the next 6 – 12 months?
The equity collections of MFs is a good pointer to retail sentiment and the data suggests continued preference to equities. The SIP flows have seen a modest dip in April and suggests that households continue to prefer equities. The households could prefer savings over consumption after the income shock faced by them due to the shutdown. Some of these savings could be allocated to mutual funds.
What has been the impact on the retail and institutional broking business of Covid-19 pandemic induced market fall and the lockdown? What is the road ahead for the next two quarters?
Institutional broking business has been more or less in line with pre Covid trends. Volatility drives up volumes, but market volumes will likely taper off once that subsides. On retail front we have experienced an increased participation in direct equity by investors as well. There is a significant increase in account opening queries. There have been many queries for asset allocation and wealth preservation strategies. Many are first time investors from the younger generations who have entered the market after a significant fall in March. Thanks to our work-from-home tablet office – Advisor Anytime Anywhere is helping us significantly and is used by about 2000 of our employees and partners in serving client needs. We expect there should be good traction in retail for segment in next few months.
Do you see more pain for the financial sector, especially non-bank finance companies over the next one year? Do you expect the NPAs rise for the entire banking universe as unemployment in the economy goes up and employees endure pay cuts?
The NPA should rise for both the banks and NBFCs as unemployment has jumped to record levels and small businesses may not enough funds to survive the shutdown of business. The three-month loan moratorium announced by RBI should help to some extent. However, it will not be able to prevent a spike in non-performing loans. Though, the economic stimulus announced last week could potentially trigger a large cash infusion in the economy as it has covered both, lower and highly-rated NBFCs/HFCs/MFIs, across several measures versus only highly-rated companies in the first Partial Credit Guarantee Scheme (PCGS). The Special Liquidity Scheme (Rs300bn) seems low in quantum, while the PCGS 2.0 (Rs450bn) could be effective. With the right conditions, these packages could address the cash flow issues NBFCs and SME/MSME are facing currently. However, more measures may be required to improve investor confidence in the sector.
What are your projections for corporate earnings in financial year 2020-21 (FY21) and FY22? Do you expect the pace of earnings downgraded to pick up pace over the next couple of quarters?
We expect the corporate earnings to decline in FY21, given our expectation of contraction in GDP. The downgrades momentum could continue through the year, as the extent of damage to the economy due to COVID epidemic becomes clearer. As per a stress-case scenario done by IIFL Institutional Equities research about a month ago, we broadly assume a GDP growth estimate of 3.5% for FY21 and of 4.5% for FY22, reflecting a prolonged impact of the virus and lockdowns on the economy. We have, accordingly, assumed significantly lower volumes and revenues across sectors, as far as uniformly possible, and attempted to identify companies whose prices are already reflecting a stress case, but whose earnings and balance sheets are relatively immune. Our stress case FY21 Nifty EPS is ~25% lower relative to estimate of 14 Jan 2020.
Has the rally in stocks like Reliance Industries (RIL), Hindustan Unilever (HUL), fast moving consumer goods (FMCG) and pharma sector stocks run its course? Which sectors and stocks can take the markets higher / lower from here on?
Pharma will continue delivering upside over the next 2-3 years. The US business profitability is set to improve over the next 2 years. We prefer Cadila, Dr.Reddy's and Aurobindo, as they have the best product fit to take advantage of the circumstances. For these three companies the valuations are also not too rich. The broader market is likely to continue to remain unpredictable for some time.
What has been your market strategy since the March lows? Overweight and underweight sectors?
We remain overweight on Pharma, Telecom, Insurance and maintain underweight on cyclical sectors like Industrials, Metals & Mining etc.
What is your interpretation of the recent policy measures announced by the government? Is that what the markets and the industry was expecting?
While we await details of implementation of the announcements, some of the policy steps to improve funding access to NBFCs (via credit guarantee to Rs300bn fund and partial credit guarantee to Rs450bn fund) are a positive in our view. However, equity funding plans could face challenges on valuations, participation from other financial institutions etc. The fully guaranteed loans to SME borrowers would also be useful to improve liquidity in the economy. However, more steps would be needed to revive growth. That said, few more press conference of FM have been scheduled and we remain hopeful of more measures to revive growth. This announcement of amendment of essential commodities act will likely remove a major hurdle for farmers and the food supply chain. The whole agri-supply industry and retail chains will see a news business scenario all together, however, we need to wait and watch how it unfolds.
There have been reports that some leading credit rating agencies may cut India’s sovereign rating in case the government roll out stimulus measures, which in turn, can put pressure on the fiscal situation. What’s your view? Are the markets pricing in this event?
The concerns of rating downgrade due to higher public spending is not justified in our view. Prospects of growth rather than fiscal deficit level in the short term has a larger weightage in rating decision and if public spending can help revive growth, it is unlikely to be considered as a negative by rating agencies in our view.