DAILY VOICE | RBI may remain accommodative; BFSI to lead the next rally: Gautam Duggad of Motilal Oswal

Market Outlook

Gautam Duggad, Head of Research, Institutional Equities at Motilal Oswal Financial Services expects the Reserve Bank of India (RBI) to maintain its accommodative stance and prioritize growth.

He expects BFSI (banking, financial services & insurance) to lead the rally as unlock measures progress. Edited Excerpts:-

Q: What is your reading on the RBI monetary policy concluded on Friday? Do you think the central bank can hint about interest rate hikes in its policy meetings in the second half of CY21?

We don’t think so. We believe RBI will remain focused on alleviating the stress from COVID second wave. We expect RBI to maintain its accommodative stance and prioritize growth. We think current inflationary pressures are transitory and RBI won’t disturb the apple-cart and focus will remain on prioritizing growth and economic recovery.

Q: What is your view on March quarter earnings ended this week? Do you expect a significant cut in earnings estimates for FY22 due to the second coronavirus wave?

Q4FY21 earnings have been in line and have benefited from the deflated base of Q4FY20 as well as the recovery we saw in demand in January-March 2021. Rising commodity prices also helped earnings. However, earnings revision has been weak in the broader universe due to extended lockdowns and uncertainty around the second wave of COVID-19.

We have seen the downgrade to upgrade ratio going back to 2:1x. Nonetheless, in Nifty50 so far, we have not seen big cuts as commodity-oriented sectors – Metals, Oil & Gas, Cement – have overcompensated for the cuts in Auto, Consumer sectors.

Q: What are the major hits and misses among sectors in the March quarter earnings?

Major hits were the earnings posted by Metals sector with a profits up 3.8x YoY. Oil & Gas sector also benefitted from sharp and better-than-expected inventory gains in OMCs (oil marketing companies) and posted more than 100 percent growth in profits. NBFC and Healthcare missed our estimates.

Q: Do you expect more upgrades than downgrades in the coming quarterly earnings with easing lockdown and COVID pressure?

We will wait and see how the unlock progresses across various states and how demand responds to those unlocking measures. The pace of vaccination is also an important metric to track, in our view. For earnings to see upgrades, the pace of unlocking and economic recovery has to be far better than what is currently envisaged.

Q: Which sectors are underleveraged now and may lead the next round of rally?

We expect BFSI to lead the rally as unlock measures progress. Largecap banks are well provided for the stress, have strong capital positions and are gaining market shares. We also expect the IT sector to do well given the underlying digital transformation journey embarked upon by global corporations. Our preference for the Consumer sector stays intact given the solid long term compounding theme at work.

Q: India hit $ 3 trillion market capitalisation in May 2021. Do you think the country can hit $ 5 trillion in market capitalisation much before than $ 5 trillion economy target? When can be both possible and what are the drivers for both?

It is tough to forecast timings for such big-scale events. However, we believe, corporate earnings growth is critical for market-cap to hit the $ 5 trillion mark. And that can happen, only when the economy does well for the next five years. In the long term, markets and corporate earnings are closely linked. And for corporate earnings to do well consistently, the economic growth momentum has to remain strong. Drivers for the economy to do well, apart from consumption which is the bedrock of India growth story, now include manufacturing (given the government’s multiple initiatives) and capex cycle.

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