DAILY VOICE | India Inc is expected to see strong earnings cycle over next 2-3 years: Rupen Rajguru of Julius Baer

Market Outlook

Rupen Rajguru, head of equity investment and strategy, Julius Baer, believes this is a ‘buy on dips’ market along with it being a ‘de-polarised’ one. He does not foresee a 2020-like scenario wherein a nationwide lockdown affected the economic growth.

More localised restrictions are expected to be put in place to curb the spread of COVID-19, which companies can handle, he said.

Rupen has over 19 years of experience in the Indian Capital Markets. Rupen has been with Julius Baer – erstwhile Bank of America Merrill Lynch for the past 12 years and prior to that, he has worked with HDFC Bank and Citibank NA.

After a period of almost 7 years wherein the Nifty earnings grew in low single-digits, we expect to enter a phase of strong earnings, he said in an interview with Moneycontrol’s Sunil Shankar Matkar.

Edited Excerpts:-

Q: What is the mood like on Dalal Street right now?

The short-term mood of Mr. Market changes every day based on the news flow, and it swings from euphoria to panic (and vice-versa) in a matter of no time. The most topical thing in the mind of every Indian right now is what will be the impact of COVID second wave on the economic recovery.

While intuitively one would like to extrapolate a repetition of what happened last year (in terms of nationwide lockdowns and subsequent impact on economic activity), we now have a slightly different view here, as we believe that both consumers and businesses are better positioned and know how to adapt to the lockdown/restrictive measures.

The most important lesson from last year is that the movement of goods should not be hindered, even if the movement of people is. Hence, a catastrophic repeat of what we saw last year is unlikely, unless there is a national lockdown of the same severity. The markets/investors also seem to be behaving in a more matured manner, willing to look beyond the near-term stress, and looking at the recent softness as an opportunity.

Q: Can the market direction completely change in the second half of FY22 and can we expect the year to end with double-digit gains?

As discussed above, we do not expect a significant derailment in the economic activity, as we expect more localised lockdowns (and not a national lockdown) induced by the second wave of COVID-19.

A pick-up in the vaccination drive, some sort of herd immunity getting developed, and the lagged impact of easy financial conditions, fiscal spending (government capex) and strong global growth, could be cyclical tailwinds.

After a period of almost 7 years wherein the Nifty earnings grew in low single-digits, we expect to enter a phase of strong earnings, led by robust economic recovery, low interest rates, massive pandemic-induced cost restructuring by corporate India and a high degree of operating leverage.

Also, while the management commentary is suggesting a pick-up in capex and capacity utilisation, the Budget has also provided some sort of boost to the investment cycle. On the whole, we believe this is a ‘Buy the dips’ market along with it being a ‘de-polarised’ market, wherein we could see catch up/mean reversion plays like cyclicals/value outperforming high quality/high PE stocks.

Q: Do you expect first quarter earnings to get affected by fast-rising COVID-19 infections and could that impact full-year earnings growth as well?

While earnings of the corona-prone sectors (i.e. retailing, hospitality, airlines, discretionary consumption, etc.) could be affected because of the second wave, on an aggregate level, we do not see a significant impact on the earnings as of now.

Sentimentally, the financials sector could get affected, but our on-the-ground survey suggests that so far the stress is manageable, and all the private banks have enough buffer to manage any second wave impact.

On the other hand, corona-proof sectors like IT, healthcare and consumer staples’ earnings should be healthy. Meanwhile, a robust global growth could act as a tailwind to the exporters/commodity players.

To sum up, while we continue to believe that India Inc is entering a phase of strong earnings cycle over next 2-3 years, we could see a sequential slowdown in earnings in Q1FY22 led by localised lockdowns, and cost pressure because of rise in commodity prices and higher logistic costs. The big variable here is a nationwide lockdown, which we do not expect in our base case assumption.

Q: Do you still expect double-digit GDP growth in FY22, especially after second wave of COVID-19?

In the latest Monetary Policy Committee meeting, the RBI has maintained India’s GDP growth forecast for FY22 at 10.5 percent. While, we would broadly go with that number, but considering the several state-level restrictions, that number could see a small downward revision (say by 50-100bps).

The key risk here is a prolonged national lockdown. As we saw last year, the cost of a complete national lockdown is around 200 bps of GDP per month. On the positive side, the MET department is predicting a normal monsoon, which should support the rural demand. The governments as well as the private sector now have experience of managing their operations during lockdowns, and hence the impact is not expected to be as severe as last year.

The other important factor is that there isn’t a synchronised global economic downturn this time around. The two largest economies and the growth engine of the world – the US and China – are recovering well and it will cushion India’s overall GDP loss.

Q: What should investors buy if the fall continues and if the sentiment may remains weak for a couple of months?

As we are expecting an economic recovery, we like financials and domestic cyclicals as an economic leverage play over the next 1-2 years. In the near term, with the news flow towards COVID second wave intensifying (before peaking out), there could be buying interest in the ‘corona-proof’ sectors like healthcare, IT, consumer staples and chemicals.

Q: Do you expect the currency to weaken further and hit its record low levels in coming weeks?

After being stable for a long period, the INR depreciated by nearly 4 percent post the MPC meeting, as the RBI’s attempt to cap rising bond yields (through the announcement of G-SAP i.e., Government Securities Acquisition Programme, which is basically an unconditional and structured buying of G-secs by the RBI) resulted in a weaker currency.

However, we do not expect a significant depreciation from hereon, as India is running a BoP surplus and has accumulated $ 200 billion of additional forex reserves over the last 3 years, which gives the RBI enough fire power to maintain stability in USD/INR.

As far as FII flows are concerned, in the near term, rising US bond yields and increase in COVID cases could put some pressure on the flows. However, over the medium and longer term, we think India will continue to get the flows on the back of strong earnings momentum in the Indian markets as well as it being part of the GEM (Global Emerging Market) flows. Typically, the flows to GEM are strong when the US runs a high deficit (which is the scenario currently).

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