Rusmik Oza, Executive Vice-President, Head of Fundamental Research at Kotak Securities, feels that some sectors such as private sector banks, insurance, housing finance, FMCG, oil & gas, automobiles, telecom, and construction still have a decent upside and could drive the market going forward.
Oza has a rich and diverse experience of over 25 years in the equity market. He has spent more than 15 years in equity research with experience of heading research teams, and 11 years in the Wealth Management space.
In an interview with Moneycontrol’s Kshitij Anand, Oza said that investors are keeping faith in the FY22 numbers as of now but we could see adjustments in earnings forecast post-June quarter results.
Edited excerpts:
Q) Market hit a fresh record high in May. What is your outlook on markets for 2021?
A) The Nifty50 has broken the previous peak so it can stretch and go up further. As the mid and small cap Index have outperformed the Nifty-50 meaningfully we can expect some rotation in which the large caps can outperform the mid & small caps going forward.
The resumption of FII flows can allow the largecaps or the Nifty50 to do better than the broader markets in the near future.
The outlook for 2021 still looks good if we go by the potential upside. Based on Bloomberg consensus estimates the potential upside of the MSCI World Index is still ~11% and that of Nifty-50 is still ~10%.
The fall in COVID cases and likely ramp up in vaccine capacities is seen positively by investors.
Q) Market is focusing on the unlock trade. But, will the scenario pan our exactly similar to what we saw last time considering that was total lockdown and we are in partial lockdown?
A) The market has largely looked through the second wave given consensus view of limited economic and earnings impact of this phase.
In comparison to last year, the impact of COVID has been widespread in smaller and rural areas this time. We also highlight that, unlike last year, the current lockdowns had limited restrictions on manufacturing activity.
Further, the lockdown in the second wave happened in a staggered manner across different states. As cases are receding in many states we could see an easing of lockdown restrictions in a gradual and calibrated manner.
Investors are bracing for a patchy Q1FY22 in terms of earnings but similar to last year there could be some spillover of pent-up demand in the subsequent quarters.
The market and investors are keeping faith in the FY22 numbers as of now but we could see adjustments in earnings forecast post-June quarter results.
Q) What should be the ideal strategy now – should one book profits and then deploy cash at lower levels?
A) The fear of being left out and decent cash lying in the hands of investors indicates we may not see a big correction. Investors are willing to bare any minor correction in the market as most of them are sitting on huge profits.
Since the mid and smallcap Index have outperformed the Nifty-50 smartly in the last year investors need to be very cautious in what stocks they are buying.
A bottom-up approach rather than a top-down approach could be more appropriate in the case of mid and small caps.
Most probably we could see some rotation in the market cap orientation post Q4 result season whereby large caps might outperform the mid and small caps.
Investors should book profit in stocks whose valuations are near highs and which capture earnings growth for the next two years. The ideal strategy should be to buy on every dip.
Q) Which sectors likely to lead the next rally on D-Street? Time for sectoral rotation and look at sectors that remained underperformers?
A) We have seen rotation in most sectors in the last year. Underperformers like utilities, industrials, and metals have risen by 35%, 33%, and 63%, respectively in this calendar year to date.
Sectors that still offer decent upside and could drive the market going forward are: 1) private sector banks, 2) insurance, 3) housing finance, 4) FMCG, 5) oil & gas, 6) automobiles, 7) telecom, and 8) construction.
FMCG and oil & gas have grossly underperformed in the last year so we can expect them to outperform in the future.
Beyond Nifty-50 there are sectors like retailing and hospitality that can also see a smart pullback as COVID cases subside and the vaccination drive picks up.
Q) What are the key risks that the Indian market faces in the year 2021?
A) There are three main risks to equities:
1) Potential risk of the third wave of Covid pandemic which can derail economy and earnings growth projections.
2) Rising inflation could lead to global Central Banks withdrawing their easy monetary stance, &
3) Elevated commodity prices could put pressure on margins and earnings of hard-core manufacturing companies.
Q) With markets at record highs have you increased or reduced your cash position compared to last month?
A) As we are not expecting any major crash in the market it is worth remaining invested. Investors can relook at their holdings and reshuffle their portfolios based on stocks that have already run-up to the desired extent and stocks which can see future outperformance from here on.
One can position their portfolio by having higher exposure to sectors that are likely to outperform in the future (as mentioned in one of the above questions).
Investors need to study the impact of higher commodity prices on hardcore manufacturing companies and look at their valuations from an FY23 perspective.
Q) Any sector(s) that are looking overheated. For example – brokerage firms such as Credit Suisse as well as JM Financial have reduced their weightage or downgraded metals post the rally. Do you have any specific sectors in which investors can reduce weight or avoid adding new positions?
A) Few sectors have seen very good re-rating because of the business shift from the unorganised to organised playing out.
Valuations of certain segments in the building materials space (i.e. ceramics, tiles, cables and cement) have gone to historic highs.
We can expect valuations to moderate in the building material space in the future.
Specialty Chemicals is another sector where most stocks are trading between 30 & 40x on FY23E for RoEs ranging between 18-25%.
In most cases, the earnings jump in FY21 has come on the back of a sharp uptick at product prices. This may not sustain in the long run and hence we could see pressure on EBITDA in the future.
Most of the consumer durable stocks too are trading at extremely rich valuations (35-60x on FY23E). We expect commodity prices to impact margins of most consumer durable companies which could impact future earnings estimates.
Q) Companies or stocks which stood out in the March quarter earning seasons according to you?
A) The Nifty-50 companies that reported exceptional earnings growth are: Private sector banks (Axis Bank, ICICI Bank & IndusInd Bank), metals (Hindalco, Tata Steel & JSW Steel), automobiles (Bajaj Auto, Eicher Motors & Hero Motocorp), Adani Ports, Bajaj Finserv, Cipla, IOC, Reliance Industries, Sun Pharma, Titan Company and UPL. Beyond Nifty-50 we have seen very high earnings growth in sectors like: consumer durables, cement, healthcare, tyres, capital goods, Alcohol & beverages, Garment & textiles and logistics.
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