DAILY VOICE | There is broad-based earnings growth across sectors, expect 12-15% returns over long term: Neelesh Surana of Mirae Asset

Market Outlook

Neelesh Surana, CIO at Mirae Asset Investment Managers India, is of the view that while there could be volatility and corrections at an overall level, the market could return 12-15% annually over the long term.

In an interview with Moneycontrol’s Kshitij Anand, Surana, who has 26 years of experience in capital markets, said that on a sectoral basis, we have exposure to financials including insurance, healthcare, chemicals, consumer discretionary, IT, and telecom. Edited excerpts:

Q) What a ride it has been for the bulls – both Sensex and Nifty50 climbed crucial psychological levels after the Budget 2021. What is the way ahead of markets?

A) We believe that India is at a cusp of a multi-year growth revival given multiple drivers that will lead to mean reversion in growth rates.

These include low-interest rates, acceleration in manufacturing exports, buoyancy in the rural sector, consolidation toward stronger players, etc.

Overall, we expect strong growth both in GDP as well as Profit/GDP in FY22 and FY23 (Vs pre-pandemic level of the very low base of 4% GDP growth, and 15 year low PAT to GDP ratio of 2.2 percent.

Corporate Profit to GDP (%) is estimated to increase from 2.2 percent of GDP in FY20 to about 4 percent of GDP in FY23E.

Markets are always a leading indicator and thus have climbed the wall of worries and disbelief which is prevalent among certain sections of investors.

Going ahead, while there could be volatility and corrections, at an overall level, we expect about 12-15% annual returns over the long-term.

Q) The underline assumption in the equity market is a recovery in the economy. We are seeing some green shoots in the economy but do you see any risks to the ongoing rally both locally and globally?

A) We would like to watch for three risk factors. One, any significant increase in commodity prices, particularly oil prices, will impact the macros as the government may be compelled to reduce the excise duty to protect consumers.

Two, after two years of back-to-back good monsoons, any disappointment would impact rural consumption.

And, lastly, any significant reversal in global ‘print and spend’ by global policymakers and government and increase in interest rates could impact flows to the emerging markets.

Q) The December earnings seasons cemented the fact that recovery is underway. Data suggests that over 70% of the Nifty companies that have reported earnings in Jan’21 have beaten estimates. Do you see more upgrades to the earnings cycle than downgrades which was the trend for the past few years?

A) 47 out of 50 Nifty companies have reported results for the December Quarter. Aggregate growth in profit of Nifty companies is 26 percent YoY and 19 percent QoQ.

The EBITDA margins (ex-financials) have expanded by 400bps YoY to 20 percent from 16 percent in Dec’19 and 19.3 percent in Sep’20.

There is broad-based earnings growth across most sectors. Going forward, while sales momentum will be intact, we would expect some margin compression from an increase in the input cost and discretionary expenses like an advertisement, etc.

BFSI and Technology is estimated to be the major contributor to growth for Nifty contributing an incremental 54%/42%/52% of the incremental PAT growth for FY21/FY22/FY23.

Overall, the consensus Nifty EPS has been upgraded by ~10%/2%/2% for FY21/FY22/FY23 during the 3QFY21 earnings season to INR 630/690/820. On FY20 Nifty EPS of 450, the 3 yr growth is 22% CAGR with FY23 EPS now estimated at 820.

Q) The common argument which is given is premium valuations are sustainable in light of economic and earnings up-cycle. Earnings upgrades would support and drive valuations. Do you agree?

A) The past six years of anaemic growth in earnings led to polarised markets skewed towards a few performing companies. Unlike the past, we are now witnessing a broad-based recovery in earnings growth over the next three years.

This is primarily led by bottom-up rebound and reversion- to-the- mean in certain large sectors like Financials, Consumer Discretionary, telecom, Infrastructure, IT, etc.

Each has different reasons, but at an aggregate level earnings outlook is more benign than pre-pandemic levels. Revival in earnings growth and low-interest rates would support the valuations.

Q) Where are the opportunities in the market which investors can grab post Budget 2021?

A) Our strategy remains to invest in long-term structural opportunities at a reasonable valuation. On a sectoral basis, we have exposure to Financials including Insurance, Healthcare, Chemicals, Consumer discretionary, IT, and telecom.

Apart from long-term core holding, we hold about 20% in a set of businesses that are deep in value – these include Oil & Gas, Metals, selective PSUs, etc.

Q) Retail investors have consistently pulled out money from MF and January was no exception but SIPs continue. What does the trend suggest – does it mean that retail investors who can manage money are using the trading channels to route the money or there is a larger trust issue?

A) MF redemption in the recent past are driven by disbelief, and fear that markets are disconnect to the present environment- Earnings revival going forward, and also experience of decent past returns would first stem the ongoing redemption trend and subsequently lead to inflows during particularly if there is any sharp correction.

Retail investors buying on their own is a fad and is not a sustainable long-term wealth creation proposition.

Q) How should investors invest money – go the SIP way or make a diversified portfolio of 15-20 stocks or a mix of both to take leverage of growth push seen in the economy?

A) We would advise following a well-crafted balanced asset allocation. Within the equity allocation, investors should commit to about 5- 6 equity-oriented funds from a minimum of 3 yr. time frame.

Investing on your own should be strictly avoided and investors should weight experience across cycles – both in bull and bear markets before investing on their own.

Confidence arising only during the bull market should not lead to direct investments. Mutual Funds are well-proven vehicles to create sustainable wealth on a risk-adjusted basis, given its past performance, liquidity, transparency, and cost considerations.

Q) Sensex climbed historic levels of 52000 while Nifty50 broke above 15400 – how do you chart your journey in markets and any instance which you would like to share with your readers when you got stuck but eventually got through?

A) In a growing economy, and increasing earnings trajectory absolute levels like 50k or 52K is always more a matter of time (when), rather than if.

Dislocation and event like pandemics and subsequent recovery in the market have only taught us to stick to basics – diversified portfolio of strong business at a reasonable price without leads to wealth creation.

There are many stocks that gave quotation losses during CY2020, only to be recovered subsequently.

Q) Your checklist to investors on how to pick stocks in 2021 or post COVID as the pandemic changed a lot of things, the way business work, the metrics etc. Pandemic has improved our internal research productivity as a lot of interactions are now taking place digitally.

A) Regarding the checklist of stock selection, the overall approach remains the same – that is around participating in quality businesses, but up to a reasonable valuation.

Analysis of all three buckets – Business, Management, and Valuation is important from a risk-reward matrix and outliers on each of these factors need to be avoided.

These outliers include either the sub-par quality of business or management and at the other extreme of great businesses but with an exorbitant price tag.

In our view, GARP (growth-at-reasonable price) is a proven approach in the long-term Vs the recent fad of Buy-at-any price.

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