DAILY VOICE | Nifty earnings likely to double YoY on a low base, say Pankaj Pandey of ICICI Securities

DAILY VOICE | Nifty earnings likely to double YoY on a low base, say Pankaj Pandey of ICICI Securities
April 19
11:02 2021

Pankaj Pandey, Head of Research, ICICI Securities, expects the Nifty earnings to nearly double on YoY basis to Rs 170 a share in Q4FY2 on a favourable base. He sees metals and oil & gas space doing well but has concerns for the auto space, a key user of commodities that have been rising steadily.

Pandey has more than 20 years of experience of the financial services industry. Before joining ICICI Securities, he worked with Religare Technova.

In an interview to Moneycontrol’s Kshitij Anand, Pandey says he continues to be positive on IT and pharma as long-term portfolio plays, with both sectors showing resilience and seeing a rise in demand. Edited excerpts:

What does the recent mutual fund data say about investment trends among fund managers?

Domestic equity mutual fund managers have been net sellers in the last few months and have sold shares worth Rs 1.25 lakh crore from July 2020 till the last week of March 2021.

The redemption pressure in equity and hybrid schemes and shift in allocation to debt from equity into their balanced advantage funds was the primary reason for them being net sellers.

However, the month of March saw a reversal of trend, where mutual funds have bought net equities worth Rs 4,600 crore in the last week of March 2021.

The month of March 2021 also saw inflows of Rs 9,100 crore in pure equity funds after continuous outflow for eight months.

There seems to be a lot of money sitting on the sidelines and waiting to enter the equity market at every correction as seen in the month of March.

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

The RBI has been very accommodating in its monetary policy stance ever since the pandemic occurred last year. It cut benchmark repo rate, bought G-Sec worth Rs 3 lakh crore through OMOs in FY21 and ensured system liquidity remained in surplus.

It also resorted to regulatory forbearance along with sustained easy liquidity forward guidance to ensure market sentiment remains buoyant.

In its April policy, it stated that the focus remains to “sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy”.

There is every reason to believe that if the growth impact of the second wave of the pandemic is significant, the RBI has enough conventional and non-conventional tools to provide policy support.

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

We expect the Nifty earnings to nearly double on a YoY basis to around Rs 170 a share in Q4FY21, albeit on a favourable base ie COVID-19 impacted Q4FY20.

Encouragingly, however, Nifty earnings are seen gaining strength, with QoQ growth pegged at around 5 percent, which bodes well for the structural upmove in the corporate earnings going forward.

The sectors that are expected to outperform would be the commodity pack namely metals and oil & gas space. The metal sector is seen outperforming due to firm domestic demand and healthy metal realisations.

While the oil & gas space is seen benefitting from favourable base (inventory losses in the base quarter due to a sharp correction in crude price, at the onset of Covid-19).

The sector that is expected to be a laggard would be the auto space as they are the key users of commodity largely metals, plastics, and other crude derivatives.

Margins at the Auto OEMs are seen declining in upward of around 300 bps QoQ. We did see auto OEM’s increasing prices during the quarter, however, the hikes have been quite calibrated as the demand environment was still fluid.

Two sectors that stand to gain from COVID, tighter curbs and have proven their worth in 2020 are life insurance and AMC companies. Do you think these are good for a decade that could produce the next set of multibaggers?

Certainly, life insurance and AMC companies are good long-term portfolio bets.

Amid COVID-19, there is a growing awareness about insurance as a segment. This we believe is acting as the long-term investment thesis for the life insurance sector, the drive of which will only increase going forward amidst mere ~3 percent penetration of life insurance domestically.

Financialisation of savings has been an underlying theme for the past few years. We believe it holds true in today’s world as well particularly when global central banks have committed to keeping interest rates low for a long period of time.

This makes traditional fixed deposits not an attractive, inflation-beating, investment option. Hence, with more formalisation of the economy, less attractive investment options elsewhere, we see robust inflows and Financialisation gaining further strength, thereby benefitting the AMC space.

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

We continue to like IT and pharma as long-term portfolio plays and are structurally positive on them.

IT space has shown resilience across time frames and is a clear beneficiary of increasing corporate spending on digitalisation and cloud infrastructure.

While in the pharma space, we have proven our manufacturing excellence to the world and are presently the key exporter of APIs, formulations, CRAMs as well as vaccines. We are very well equipped to be the pharmaceutical manufacturing capital of the world.

In the specialty chemicals domain, one needs to a tad watchful, as stock price action in this domain was due to sudden spurt in some of the key product prices which could cool off as supply situation as well as crude price normalise.

The focus should be on long-term sustainable growing businesses that are capital efficient in nature.

Many interesting companies have hit D-Street in 2021 and many more have lined up to hit D-Street to raise money in the near future. What is the checklist that one should follow to avoid traps? More than 20 companies have listed so far in 2021 but, most of them are trading with marginal gains after initial pop?

As an investor, one should not get carried away with the IPO frenzy amid record subscriptions to nearly all the IPO issues.

As an investor, the focus should be on owning businesses that have a long-term sustainable competitive advantage (MOAT) so as to grow at an industry-leading growth rate, have manageable leverage on B/S, generate robust cash flows, and are capital efficient in nature.

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

As a thumb rule, lower debt is always preferred, however, its ideal share in the capital structure varies across sectors. For example FMCG, auto OEMs have hardly any debt on their books, so for them debt: Equity <0.5x is preferable.

However, in the infrastructure space like road building, power, etc debt forms a large part of the capital structure due to the very nature of large size asset building, hence in that domain Debt: Equity <2 is preferable.

While in the banking & financials space, debt is actually the raw material and hence in that domain, a different matrix is followed.

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