#39;Decent earnings likely in FY22, but biggest risk to market is likely NPAs in future#39;

Market Outlook

The performance of Indian equity market in FY21 has been historic, Nifty50 index gave a return of 71 percent, the best in fiscal years. Post this high performance, investors are getting anxious & cautious with a dim performance in the recent days. It seems incorrect because when we adjust the correction made in the quarter of January-March 2020, the returns become normal.

The jolt was due to the pandemic bringing uncertainty. Nifty50 has corrected by 29 percent in Q1CY2021, the worst correction was 38 percent as per the low of March 24. The 15-month return from December 2020 to March 31, 2021 is 21 percent.

I feel that we have a good chance to make decent returns in FY22. Concerns of high oil prices, slowdown in stimulus (liquidity), rising inflation & interest rate, high valuation and NPAs is valid. But the economy is just coming to its true nature of generating business & profits. The economy is verging towards normality, which is the main reason for the rise in commodity prices, inflation and short-term interest rates, which is also supported by a low base.

All these risky points are supported by growth. We all know that Indian real GDP growth is expected to be buoyant in FY22 in a range of 11 percent to 13 percent. Firstly, the sensitivity of Indian market to rising crude price is only in the short-term. We have always continued to perform better on a medium to long-term by adjustment in excise duty, fall in India’s crude basket price and growth in economy. Importantly, the relativity of India’s equity market movement to oil prices is reducing due to increasing local oil & gas, renewable energy and ethanol fuel. The global & domestic demand for crude is on a long-term negative trend due to strategic plans on green energy.

The second concern that the rally till date is only due to liquidity is not the correct view. The new money was required to build financial support and kick start the standstill economy. Today, the economy is self-sufficient and we may not need further stimulus. So, a drop-in stimulus is expected and will not bring a negative effect on the market & economy.

Thirdly, the rising global & domestic inflation and bond yields are a core requirement of a pandemic hit economy. Inflation has to be maintained above the normal level to make the economy stronger. At the same time, central banks will maintain accommodative stance and low bank rate. Though the short-term interest rates will be volatile and on the higher side as we are in a scenario of rising inflation & interest rate, which will help the economy and corporates to survive & grow.

Fourth, of-course the valuations are on the higher side. This is due to low base of earnings and lack of ability to forecast the earnings in the short-term due to uncertainty of pandemic. In the last three quarters, we are continuously reporting surprised results and further upgrade in earnings growth. This trend may continue in FY22 too, given strong upside in economy and supportive government policies. This is a period where valuation parameters like P/E may not be the best indicator to assess the level & trend of market. We are bound to trade at premium levels during this period.

Fifth, the biggest risk to the market may be rise in future NPAs, which will heavily impact the financial sector, accounts the highest mix of India’s total market capitalisation. Though the economy has recovered well, the level of debt in the system is high. New debt is not generating enough revenues as it is mainly to support & survival of the industry. In India, NPAs was high even before the pandemic, today they are in high need to restructure. New loans, guarantee to MSME and relaxation by RBI on the classification of new NPAs is providing an incorrect picture of the actual non-performing assets in banking sector. There is great hope that recovery and continued support from government & RBI will help the economy & banking sector for the next 2-3 years.

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