DAILY VOICE: Buy into weakness in discretionary segments and not just on lockdown trade, says Piyush Nagda of Prabhudas Lilladher

Market Outlook

Piyush Nagda, Head, Investment Products, Prabhudas Lilladher, says the near-term focus is likely to shift towards defensives. IPOs for funding growth or big expansion should be preferred versus IPOs to repay debt or mediocre expansion, he says.

Nagda has more than 20 years of experience of the financial service industry. He has worked with Motilal Oswal, JM Financial and Axis Securities in senior management roles driving pan-India businesses across investment products.

In an interview to Moneycontrol’s Kshitij Anand, Nagda says in the near term, IT, pharma, specialty chemicals and consumer staples will be less affected by lockdown-like restrictions. Edited excerpts:

What does the MF data suggest about the investment trends of fund managers in the recent past?

Investment themes in 2020 included Global Investing, ESG Investing, Passive and Multi-Asset investing. This is evident in the recent NFO launches from various AMCs.

Fund managers preferred growth investments for most part of the year. Technology and digital transformation became an accelerated priority the world over for large companies and the IT sector gained the most from it.

MF data shows that the IT-software sector was the biggest beneficiary of sectoral rotation/rebalancing. Its weightage jumped 43 percent on a year-on-year (YoY) basis from 8 percent, and to 11.45 percent across all equity MF schemes. This was the highest growth among all sectors.

Total monthly equity MF AUM in January-March 2020 was around Rs 8 lakh crore (barring the March blip), out of which the average monthly valuation of IT software holding was Rs 64,000 crore — 8 percent weightage.

In January-March 2021, the figure stood at Rs 10.55 lakh crore, out of which the valuation of the IT sector holding was Rs 1.2 lakh crore — 11.45 percent weightage (a 43 percent jump in sector weight). This is partly due to a valuation gain and partly due to an increase in allocation by fund managers.

On the debt fund side, fund managers preferred a roll-down strategy to bring predictability and certainty in future returns.

If we see another phase of lockdown, do you think IT, pharma, and specialty chemicals could lead the charge? Will the trade once again tweak towards sectors that were winners of the 2020 lockdown?

The situation in the current year is very different. Even though COVID-19 infection is much more, the possibility of a nationwide lockdown looks remote.

In the near term, IT, pharma, specialty chemicals, and consumer staples will be less hit than most other sectors. However, given a sharp global upsurge in metals and the huge Infra push by the government, and the resilience showed by other sectors, post-June 2020, the trade will not entirely shift to these sectors.

We don’t rule out the near-term focus shifting to defensives, though. We are recommending buying into the weakness in discretionary segments and not focus only on lockdown trade.

Equity MFs witnessed outflows in FY21. What led to the redemption pressure?

The year 2020 will go down as the most dramatic one in the history of investing. Post the lockdown crisis, markets fell by more than 35 percent in March 2020, followed by a spectacular rise, touching all-time high levels in February 2021 on the back of a huge inflow of foreign funds.

In the past eight months, investors continued with redemptions mainly due to three reasons:

1 Fear of uncertainty and volatility

2. Directly playing in rising stock markets

3. Shifting to other asset classes, mainly gold and real estate

This trend is slowly reversing and the March 2021 AMFI (Association of Mutual Funds in India) data shows a net inflow of Rs 9,115 crore in MFs– the highest since March 2020.

Also, SIP inflows saw a 22 percent increase to Rs 9,182 crore in March 2021 as compared to Rs 7,528 crore in February 2021, indicating that investors are returning to this powerful investing tool, which combines staggered investing with a disciplined approach.

We see a positive change in investor behaviour as profit from direct stock market play or surplus from the sale of other assets is getting parked in debt schemes, and, from there, a combination of STPs and SIPs is channelling it to equity funds.

The RBI policy was largely dovish. Do you think it is enough to battle another phase of lockdown in case COVID-19 spreads to other states?

To sustain growth, the RBI maintained an accommodative stance by keeping rates unchanged. It kept the liquidity tap open by extending liquidity initiatives like Targeted Long-Term Repo Operations (TLTRO) on-tap scheme, and bank lending to registered NBFCs under priority sector (other than MFIs) to September 30.

Also, liquidity support of Rs 50,000 crore has been provided for fresh lending during FY22 to Nabard, NHB and SIDBI. RBI Governor Shaktikanta Das has stated that the current Covid surge should not impact growth so much this time.

The industry is hopeful that with the ongoing vaccine programme, Covid disruption this time will be a short-term blip.

How are the March quarter results likely to pan out for India Inc? Which sectors could outperform and which ones could lag?

We estimate a 21.1 percent YoY growth in sales, 43.2 percent growth in EBIDTA, and a 101 percent growth in PBT on a strong 320bps margin expansion on a low base impacted by the lockdown in March 2020.

Ex-BFSI EBIDTA and PAT growth is estimated at 78 percent and 271 percent. Ex Oil and Gas EBIDTA growth is 38.8 percent, while PAT growth is 86.5 percent.

  • Q4 is led by strong pickup in consumer demand and Infra spending. Auto, cement, consumer durables and metals will lead the top line growth while agri- chem, pharma, media, and aviation will be laggards.
  •  Auto will report 138 percent and metals 114 percent rise in EBIDTA. Oil and gas, pharma and consumer durables will report EBIDTA growth of 77 percent, 35 percent, and 56.8 percent, respectively. Consumer and IT will report growth of 23 percent and 205 percent while aviation and education will report a decline in EBIDTA.
  • PBT is expected to grow by 245 percent for oil and gas and 165 percent for metals. The auto sector will report a profit after a loss last year. Cement, durables and pharma will report growth of 60.7 percent, 47.4 percent, and 58.8 percent, respectively.

Two sectors that stand to gain from COVID-19 and proved their worth in 2020 were life insurance and AMCs. Do you think these two sectors are good for a decade that could produce the next set of multibaggers?

Insurance penetration (premium to GDP) for combined Life & Non-Life is just 3.76 percent and Mutual Fund penetration (AUM to GDP) for combined Equity & Debt is just 12 percent, making India a large untapped market.

Both the insurance and asset management sectors in India will witness a multi-year bull run as the pandemic has accelerated a much-needed mass awareness among savers to insure and invest. Tech-enabled innovations and digital fulfilment will help in steady growth across geographies.

Many interesting companies have hit the D-Street in 2021 and many more are lined up. What is the checklist one should follow? Over 20 companies have listed, so far, in 2021. But most of them are trading with marginal gains after the initial pop.

India’s IPO market is witnessing a dream run, like never before! In FY21, almost 30 companies raised around Rs 31,000 crore, and, for FY22, the pipeline is looking stronger.

Good IPOs reward investors very well through listing gains and sustained growth. HDFC AMC, Avenue Super Markets, IRCTC, Affle, IndiaMart Intermesh, Route Mobile and Happiest Minds are examples.

Investors should be careful in choosing IPOs and not apply blindly as there are many examples of negative gains as well.

All usual checkpoints like promoter background, parentage, financial performance, backing of large investors, market size, market share, margins, etc are important to know. One area everyone should look is the objective of fund utilisation.

IPOs for funding growth or big expansion should be preferred versus IPOs to repay debt or mediocre expansion, and they should be evaluated with caution.

Do you think managing debt is an important parameter, especially after the COVID outbreak? How much debt is good for companies on books and should investors avoid companies that have high leverage on books?

There is no set formula for debt. However, in the past 1-2 years, corporate balance sheets are much leaner and 2020 has seen a large number of corporates raising funds to bolster their balance sheets and reduce debt levels.

We prefer companies with strong balance sheets. Debt can’t be completely wished away in Infra and some of the capital-intensive sectors. However, it should be reasonable, relative to the operations of the company.

Which stocks are likely to be in focus after the cabinet approved production-linked incentive (PLI) schemes for white goods and solar modules, which would together cost the government Rs 10,738 crore over five years?

AC, solar modules, and LED lighting have been brought under the PLI scheme and the focus will be more on their components. We believe Amber, Voltas and Havells (Lloyd) might benefit from this. However, details are yet to be rolled out fully.

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