The 3Q reporting season so far points to continued improvement in earnings momentum. The aggregate profit of 347 BSE500 companies (that have reported 3Q results so far) has grown by 57% YoY (vs. ~26% YoY last quarter). While turnaround of PSU Banks and acceleration in profits of Metals & Mining companies have contributed to this acceleration, even excluding financial and commodity companies, the aggregate profit grew by ~29% YoY (vs. ~19% YoY last quarter). It is now quite well known that the pickup in corporate earnings from 2QFY21 was largely driven by margins. However, the aggregate (ex-financials and commodities) sales growth also improved to ~7% YoY in 3QFY21 (vs. 0% YoY growth last quarter). This pickup in sales growth raises the confidence in the sustainability of the earnings growth momentum. The aggregate FY22 PAT of BSE500 companies has been upgraded by ~6% through the 3Q reporting season and suggests that the results so far have positively surprised the street.
What do you want to add from the portfolio, in terms of sectors, after earnings, and why?
We reiterate our preference of Private Banks, Chemicals, IT, Insurance and Auto sector. 3Q results have been significantly better than expected several companies like Apollo Tyres, JB Chemicals, ICICI Bank etc. and outlook for these companies is also promising.
What do you want to delete from the portfolio, in terms of sectors, after earnings, and why?
We believe the interest rates are likely to have bottomed due to inflationary pressure, large government borrowings and normalizing credit growth. Hence rate sensitive sectors should be avoided in our view.
What is your analysis on the Budget fineprint as most experts feel it is a growth-oriented budget? What is your rating to the budget out of 10?
The government has done a good job of balancing the need for higher public spending but avoiding higher taxes. The reasonable math for FY22 and improved transparency improves the credibility of budget estimates. While the fiscal stress had raised doubts on government’s focus on infrastructure spending, the FY22 allocation for roads has been raised by 40%.
Do you think the budget really gave a boost to the banking & financials sector as Bank Nifty itself rallied 17 percent in just a week? Do you think the creation of a bad bank will solve the NPA problems if they arise in the future?
The idea of Bad Bank has been floated since last few years and this can be a useful tool to cleanup the bank balance sheets. While we await the details of Bad Bank setup, the execution would be key to the effectiveness of Bad Bank in resolving the issue of NPAs. The rally in banking sector is partly due to better than expected outlook on non-performing loans due to Covid19.
What should be the investment strategy post Budget 2021? Should investors continue with buy on dip strategy, to rejig their portfolio?
We believe the cyclicals should outperform post the budget and prefer SBI, ICICI Bank, L&T, Thermax, Cummins and KNR Construction.
Do you think the divestment target set by government (which also promised to deliver) is achievable given the current scenario?
Clearly the divestment target of Rs1.75tn is quite stiff. The secondary market offerings may not be sufficient to achieve such a steep target and some of the strategic sale transactions like BPCL, Air India etc. would have to be closed. Although the government has announced sales of 2 PSU banks and one insurance company, the track record of strategic sale process suggests that closing these transactions within one financial year could be difficult.
This interview was published on Moneycontrol on February 17, 2021