Neeraj Chadawar of Axis Securities valued the Nifty at 22x at FY23 earnings translating to December 2021 target for Nifty at 16,000, after December quarter earnings season.
Overall, earnings visibility has improved across the board; Nifty FY21 and FY22 EPS have been upgraded by 6 percent till now during the quarter with likelihood of further upgrades on the card, he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
The Head of Quantitative Equity Research at Axis Securities believes the laggards of the last decade are seeing more traction and could see increased allocation in the forthcoming quarters.
Edited excerpts:-
Q: What is your analysis on the Q3 earnings so far? Do you expect upgrade in earnings to continue given the slew of reform measures?
All round recovery continues in Q3 earnings. Quarterly commentaries from the management are upbeat and projecting a robust outlook. So far, we have seen more ‘beats’ than ‘miss’ in the corporate earnings in which earnings upgrade momentum is higher versus the downgrades. Two positive trends of last quarter continue in Q3 also: a) visible expansion in the margin across the board led by better control over cost by the management and b) stronger-than-expected sales and volume numbers led by festive season reflect stronger economic recovery.
On the expected line, sharper recovery is seen for some of the cyclical sectors, which is resulting in further upgrades for the sector. Overall, earnings visibility has improved across the board; Nifty FY21 and FY22 EPS has been upgraded by 6 percent till now during the quarter with likelihood of further upgrades on the card. We value Nifty at 22x at FY23 earnings translating to our December 2021 target for Nifty at 16,000.
The major change in market structure will mean re-rating of sectors which have lagged for a long period. Even as sector rotation plays out, valuations across sectors like Consumer, IT and Pharmaceuticals are likely to sustain while industrials, cement, real estate and BFSI will re-rate. With this, the chances of positive surprises on earnings front has increased significantly.
Q: What do you want to add in the portfolio, in terms of sectors, after earnings, and why?
We are highlighting from the last few months that the BFSI sector is likely to do well in 2021. Taking the Budget and operating performance into consideration, we recently upgraded BFSI to overweight from the equal weight. The BFSI sector has underperformed the broader market in 2020 by a significant margin owing to issues of moratorium and the stress in the system. However, both Q2FY21 and Q3FY21 operating and financial performance across the banking sector was better-than-expected. Focus of banks has shifted to growth and as the macroeconomic cycle improves, banks being leveraged play will see stronger earnings growth.
Q: What do you want to delete from the portfolio, in terms of sectors, after earnings, and why?
Consumer staples sector has seen good demand recovery with Dabur, Marico and Asian paints beating expectations for Q3FY21. While the sector has strong earnings visibility and best in class return ratios, the expensiveness versus other sectors limits the upside as earnings visibility will improve across the board. We downgrade the FMCG sector to Equal Weight versus our earlier overweight stance.
Q3FY21 results for Pharma were a mixed bag with not-so-encouraging performance from the US business. Margins were strong but a significant portion is factored into the market prices. Significant improvement in operating metrics is needed for further re-rating. We see risks to this and downgrade the sector stance to Equal Weight from our earlier overweight position.
Q: What is your analysis on the Budget fineprint as most of experts feel it is growth-oriented Budget? What is your rating to the Budget out of 10?
Yes, the Union Budget for FY22 turned out to be a major positive with solid focus on growth through capital spending. The markets were buoyed and the benchmark Sensex was up 5 percent on the Budget day, delivering one of the best Budget day returns in the last 22 years.
As FY22 Union Budget met most of the market expectations with hardly any negative surprises. The key expectations of the Budget was on job creation through infrastructure spending, focus on healthcare and welfare schemes and maintenance of existing tax structures. The announced Budget met all these expectations and also managed to convince the markets that this will be achieved without a major hardening of bond yields.
The most critical aspect of the Budget is that it is a growth Budget with significant expansion of government spending. The Budget will help in reviving the economy which was sluggish even before the pandemic. Further, this budget is changing the market structure in favour of capex cycle and BFSI plays. The laggards of the last decade are seeing more traction and could see increased allocation in the forthcoming quarters. Rating to FY22 budget will be 8 out of 10.
Q: Do you think Budget really gave a boost to banking & financials sector as Bank Nifty itself rallied 17 percent in just a week? Do you think the creation of bad bank will solve the NPA problems if arise in the future?
The Union Budget has been a significant event as it is changing the market structure in favour of the capex cycle and BFSI plays. The laggards of the last decade are seeing more traction and could see increased allocation in the forthcoming quarters. The major change in market structure will mean re-rating of sectors which have lagged for a long period. PSU banks were the laggard from the long time and now playing a catch-up rally post Budget.
Budget has forecasted a nominal GDP growth of 14.5 percent for FY22, with this assumption credit growth likely to pick-up in upcoming quarters which will be beneficial for the overall BFSI sector. Further, the idea of the creation of bad banks will likely to resolve NPA problems which will further lead to improvement in the overall health of the financial system.
Q: What should be the investment strategy post Budget 2021? Should investors continue with buy on dip strategy, to rejig their portfolio?
The Budget tilts in favour of cyclical and rate sensitive play. Further, the Union Budget has been a significant event as it is changing the market structure in favour of capex cycle and BFSI plays. The major change in market structure will mean re-rating of sectors which have lagged for a long period. Even as sector rotation plays out, valuations across sectors like Consumer, IT and Pharmaceuticals are likely to sustain while industrials, cement, real estate and BFSI will re-rate.
Currently, we are overweight on: BFSI, Auto, IT, Speciality Chemical and Telecom, while equal weight on Consumer Staples, Consumer Discretionary, Cement, Metal & mining, Pharma and Real Estate. We are underweight on Capital Goods & Oil & Gas.
FIIs are the consistent buyers from the Budget day on account of optimism over the growth and faster than expected recovery in high frequency indicators and the corporate earnings. Investors are further betting higher on riskier assets on account of optimism over a robust stimulus package from the US government.
The market has rallied sharply in a short span, so at this juncture it is a buy on dips market, The continuous sell-off by domestic institutional investors remains a key risk. Further, if FIIs started selling and DIIs are unable to buy the positions, then we could see downward pressure in the market as most of the positives are already priced in.
Q: Do you think the divestment target set by government (which also promised to deliver) is achievable given the current scenario?
In this Budget, the government has set a target of Rs 1.75 lakh crore of disinvestment, in which disinvestment of 2 PSU banks, 1 General Insurance company & the IPO of LIC is targeted for FY22. LIC IPO is likely to be a mega IPO which will further boost the overall sentiments in primary as well as secondary market. FY22 Budget has reduced its dependence on disinvestment, betting instead on monetizing the assets; however, the execution of divestment remains crucial.
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