DAILY VOICE | FY21 has set the floor for extended growth in market for 4-5 years: Shailendra Kumar of Narnolia Financial Advisors

Market Outlook

Shailendra Kumar, Director & CIO at Narnolia Financial Advisors, feels that FY21 has set the floor for extended growth for the next 4-5 years. FY22, too, should be producing a similar kind of returns in market.

Shailendra co-founded Narnolia Securities in 1997. He is known for his deep understanding of investment theories, stock selection, and portfolio allocation. His preferred investing style is ‘growth in value’. He holds a post-graduate degree in Management & Systems from the Indian Institute of Technology, Delhi.

In an interview with Moneycontrol’s Kshitij Anand, he said that the current bull run needs to be seen as the start of a new expansion phase inside the overall India growth story. Here are edited excerpts from that interview:

Q) After the initial sell-off by FIIs seen in the first week of March, things seem to be stabalising now? Which phase of the bull market we are in?

A) Indian equity market after remaining sideways for about 3 years (2017-20) has made a decisive new high indicating start of a new phase.

While over the long period, Indian equity indices have produced 15-16% annualized return but what it actually has done is 30% annualized return over 3-4 years followed by consolidation when it produces near 0% returns over the next 3-4 years.

And this template of the expansion-consolidation cycle continues over and over again. The current Bull Run needs to be seen as the start of a new expansion phase inside the overall India growth story.

Q) The financial year FY21 is coming to an end and Nifty50 has rallied by about 30%. What really stood out for you in the last 12 months?

A) India is the 5th largest economy in the world but on a per capita income basis we remain at quite a low rank. India’s growth story is about getting rid of this anomaly.

Our growth may taper sometimes due to certain macro and policy environments but the Indian entrepreneurial spirit will ensure that we keep coming back on the growth phase. In the equity investment sense, noticeable aspects are:

Ø Corporate profit to GDP that fell from 7% to 2.5% over last ten years has started rising again

Ø Inventory de-stocking cycle is finally over

Ø Rising GST suggests has improved formalization of the economy

Ø PLI schemes have started showing positive results

Ø Government policies are now aimed more towards improving ease of doing business

Q) Where do you see markets heading in the next financial year. Any target which you have for Sensex, and Nifty?

A) FY21 has set the floor for extended growth for the next 4-5 years. FY22, too, should be producing a similar kind of returns. We could be entering an all-around optimism phase in the Indian economy.

NPA woes of the Indian banking sector have hurt the earnings of Nifty and Sensex as banking is a large part of our indices but more importantly, it has hurt credit growth and broader economic growth for the last many years.

But, we have crossed the peak of the NPA cycle in terms of provisioning requirements by our banking companies. Going forward, market prices will be catching up with the expected earnings growth.

Q) Small & Midcaps came to the limelight in FY21 and do you think the momentum will continue in FY22 as compared to large-caps and why?

A) Small and mid-cap space had been highly challenging for stock pickers during 2017-20. But, the management of many of these companies have fine-tuned their strategies over the last couple of years to face the new business reality and challenges, and going forward, the earnings and quality of many of these companies will start exhibiting sharp improvements.

Some of the current mid and small-cap companies would be becoming large companies in the current expansion phase of the economy and the market and those are must-have stocks that will help investors create huge wealth.

Q) Any event or risks which investors should watch out for in FY22?

A) We remain highly positive about the markets going forward but there are certain trends that would trigger sporadic corrections in the market.

Even during the long bull market of 2002-2007, we had multiple corrections but the pattern of higher bottom- the higher top had continued.

In the near term, rising bond yield is a dampener for valuation multiple, also rising crude and other commodity prices will put pressure on the margins of some of the companies.

But, in an aggregate sense, we have entered into a period where higher asset utilization will mean corporate profit to GDP will keep improving and the quality of earnings of Indian corporate in terms of their return on equity will keep improving keeping the markets in a strong bull grip.

Q) Which sectors will hog limelight in FY22 and why?

A) Rising Chinese imports during the last decade were negatively impacting local manufacturers in terms of their volume growth and more severely in terms of their pricing growth. Indian manufacturing sector both consumer durables and industrials will see better fortunes ahead.

Various segments of manufacturing that are part of Production Linked Incentive schemes will see even speedier growth. Electronics manufacturing companies were availing the benefit of PLI schemes for quite some time now and those companies have exhibited 25%+ annualized growth during the last 4-5 years.

Now apart from electronics, companies involved in the manufacturing of chemicals, auto components, and textile will see strong growth on account of the PLI schemes.

Q) Are there any vaccine plays which investors could look at in the next 6-12 months?

A) COVID pandemic is a big humanitarian crisis and in a direct sense 2-3 Indian generic companies particularly those that are part of the global supply chain will benefit but more importantly, the moat of the Indian pharma and related companies in healthcare will see long-term benefits.

India is set to consolidate its position as a pharmacy of the world benefitting many Indian pharma companies.

Structurally, we will see rising healthcare expenses helping diagnostics, hospitals, and health insurance companies.

Q) Do you think more retail investors will join D-Street in FY22? They made it clear that the new age investors are well informed and know about the products.

A) Financial markets across the globe have seen a rise in retail participation since COVID induced lockdown last year. Digital connectivity, wider availability of financial information, and ease of participation in the markets are some of the key reasons behind this trend.

In the Indian context, retail participation has been traditionally low and rising participation is a big positive. Rising digital penetration will further this trend going forward, we also expect higher participation into mutual funds going forward.

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