Hemant Kanawala of Kotak Mahindra Life Insurance feels if there is either a pause in earnings upgrade cycle or change in monetary stance, it could lead to a correction in the market.
“Corporate India should continue to show recovery in revenue, and profitability of banks and NBFCs should flow from lower credit cost. One important variable to monitor in this quarter is the impact of rising commodity prices on the margins of companies,” Kanawala, head of equity at Kotak Mahindra Life Insurance, said in an interview to Moneycontrol‘s Sunil Shankar Matkar.
Edited excerpts:
Experts feels COVID-19 remains a big concern. Do you feel so and what are the other risks that investors have to keep in mind for FY22?
COVID-19 is not the biggest concern in the market today. Due to better treatment protocol and availability of vaccine, there should be limited lockdowns, which should help economic normalisation. The bigger worry for investors today is the rise in industrial and energy commodity prices, which is leading to higher inflation and interest rates.
Central bankers have assured the market to overlook the inflation risk and continue the accommodative monetary policy till the economy normalises. However, if they change their stance, it can hurt economic recovery and trigger a risk-off environment.
Do you feel the RBI can indicate a rate hike in FY22 meetings, though it had promised to keep rates low for a couple of years?
The future guidance of the Monetary Policy Committee (MPC) is data-dependent and it will depend on the trajectory of inflation, unemployment and GDP growth. Currently, inflation risk in India seems to be contained by softer agri-commodity prices but there are some concerns evolving from the rise in industrial commodity prices.
Growth is expected to accelerate as the economy opens up completely and various measures announced by the government starts showing its impact. Hence, investors need to monitor these data points to form a view on future rate action by the RBI. Current data points suggest that the RBI will not hike rate in the first half of FY22.
The market continues to trade in a range for the last one month, especially after hitting a record high. Do you think the steep correction of 10-15 per cent is warranted at this point of time and why?
The market is trading at more than 80 percentile of observations on various valuation parameters like 1-year forward P/E, trailing P/B and dividend yield, which implies that valuations are high by historical measures.
Higher valuations are being justified by the expected growth in earnings over two years and low interest rates due to easy liquidity. If there is either a pause in earnings upgrade cycle or change in monetary stance, it could lead to a correction in the market.
Do you think the US bond yields will dent sentiments in the coming months? What could be the impact on India?
US bond yields determine the risk sentiment of investors. If they are rising due to better growth prospects, it should not dent the sentiment. However, if interest rates are rising due to the less accommodative stance by the US Fed, it can trigger a risk-off sentiment, impacting emerging markets, including India.
Currently, investor sentiment towards India is positive, thanks to the large forex reserves, expected strong recovery in growth and stable macro parameters. This is reflected in strong FII and FDI inflows to India, compared with other emerging markets. Hence, India should be able to withstand the volatility arising out of this scenario.
What are your broad expectations from the March quarter earnings and do you see more upgrades than downgrades after that? Will it give enough indications, with respect to FY22 earnings?
Corporate India should continue to show recovery in revenue, and profitability of banks and NBFCs should flow from lower credit costs. One important variable to monitor in this quarter is the impact of rising commodity prices on the margins of companies.
Corporate India has limited ability to pass on the increase in commodity prices, as it fears the move will hit demand and recovery is in a nascent stage. Hence, we may see upgrades in the commodity sector but downgrades in the consumer-oriented sectors. The comments of the management during the earnings season should give us a good idea about the outlook on demand recovery and their ability to manage margins.
FMCG was the clear underperformer in FY21, with just 20 per cent gains while every other sector gained at least 60 per cent. Do you think it is the right time to pick FMCG stocks and what is the outlook?
The performance of FMCG, being a defensive sector, should normally be evaluated on an absolute basis rather than on a relative basis. Their earnings are expected to compound by high single digits to low double digits over a long period of time.
Hence, when there is an economic expansion, leading to strong earnings recovery, the FMCG sector tends to underperform even if the absolute returns are decent. As the relative valuations of the sector, compared to the market, have corrected over the last one year, it offers a decent entry point for investors.
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