Satish Ramanathan, MD and CIO – Equity, JM Financial Asset Management Ltd, says that corporate earnings are at robust levels as price increases have improved margins, however, this is not sustainable if the second wave of COVID impacts demand and jobs on a longer-term basis.
Ramanathan has more than 30 years of experience in asset management. Prior to JM Financial, Ramanathan was with Tattva Capital which was his entrepreneurial endeavour. He started his career with TATA Economic Consultancy Services in 1992 and has subsequently worked with ICICI Securities, Franklin Templeton AMC, and Sundaram Mutual AMC.
In an interview with Moneycontrol’s Kshitij Anand, Ramanathan said post corrections, we believe that businesses that will do well are those where demand destruction is not on a massive scale and has some pricing power.
Q) The second wave of COVID has gripped India fast and has forced many states into partial lockdowns in April. Do you think the market could undergo some consolidation or the worst is already factored in?
A) The second wave of COVID was expected though the intensity of increase has surprised all. There has been a five-fold increase since March 24, 2021, which was unexpected.
Further, the infrastructure bottlenecks in our health care have come back once again. States have started implementing some lockdowns and restrictions, though it remains to be seen if this is effective enough.
Markets are pricing in a robust recovery in growth both at the top-line and bottom-line for the listed companies. However, a prolonged lockdown that impacts the economy could impact market sentiments. We do not believe that worst-case scenarios are built into market sentiments.
Q) After Goldman Sachs and Nomura, economists warn of more cuts in FY22 GDP forecasts. Well, it seems like the clock is ticking backwards. If the economy fails to grow in a manner that is discounted by the market, it will also hurt the earnings of India Inc. Do you see the impact on the earnings of India Inc.?
A) Corporate India has been better prepared to face COVID phase 2 than before. However, demand could again regress as the pent-up demand that we saw post-COVID-1 may not materialize. In fact, there might be some cutbacks.
Airline travel and hospitality are likely to be impacted. Indian manufacturing has been able to cope with COVID and should be able to do so if demand also continues to remain at existing levels.
GDP forecasts have been revised upward and down too often for anyone to decide which way the economy goes or markets for that matter.
The two key issues that arise are this: Can we control COVID and reduce the caseload? Can we increase vaccination rates and help reduce death rates and sickness rates?
Only after these two issues are sorted out does it make sense to speculate on the economy and markets.
Corporate earnings are at robust levels as price increases have improved margins, however, this is not sustainable if COVID 2 impacts demand and jobs on a longer-term basis.
Q) Which sectors will be back in focus amid a lockdown-like scenario? Which sector(s) should one add on corrections?
A) It is too early to call for winners and losers at this stage when we do not know the peak level of the disease. It would be too early to speculate on which sectors will do well post lockdown.
Firstly, each state is controlling COVID in its own manner, whereas compared to the first phase, everything was centralised. Consequently, there will be outbreaks in some centers which are more intensive than others.
It is interesting to note that just 3-4 states account for 50% of COVID cases. These are the high GDP states and the consequent damages could be more than expected.
How well these states control COVID remains to be seen. Although states are earnest in controlling COVID, the tax squeeze is too much to bear and hence we expect that there will be mild lockdowns and not complete lockdowns.
Post corrections, we believe that businesses that will do well are those where demand destruction is not on a massive scale and has some pricing power.
We see few defensive sectors that fit the bill such IT, Pharma and consumer. Consumer goods have had a good run in the past as people invested significantly on themselves. Whether that trend will continue remains to be seen.
Q) What is your call on the rupee? What is the range you see for the currency in the near future?
A) There could be some short-term pressure on the rupee as some selling could take place by FPIs, but structurally we are more sanguine on the rupee and strong FDIs, and infrastructure development and better trade balance improve.
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