Neeraj Chadawar, Head, Quantitative Equity Research, Axis Securities, expects a 31 percent earnings growth in FY22. Normal monsoon and a Covid-free festival season would be the biggest trigger and a blow to these would hit earning growth, he says.
In an interview to Moneycontrol’s Sunil Shankar Matkar, Chadawar says after Q4FY21 results as well as significant upgrades across sectors, Axis Securities raised estimates by 8 percent. It has revised the December 2021 Nifty target upwards to 17,400. Edited excerpts:
We are now in the second half of 2021, do you think the momentum will continue in the market after a nearly 13 percent rally in the first half?
Multiple factors are driving the market including a) downward trajectory of Covid-19 cases, b) robust Q4FY21 performance, c) unlock trade, and d) positive global cues.
Further, the volatility index continues its downward trajectory, indicating the continuation of the strong bull market.
We have just started with the Q1 earnings season, this time management commentaries are critical and that will decide the direction in the near term. As the overall demand environment in the quarter was a mixed bag, with demand loss seen in April, May 2021 and its partial bounce-back in June 2021 with the economy re-opening. Management commentaries on margins will be a key monitorable during the quarter as pressure led by raw materials headwinds will likely impact the overall performance. Barring Q1FY22, long-term structural trends remain positive for the equity market.
Midcap, smallcap and largecap value to remain key allocation themes as these themes will continue to deliver strong returns. Value investment style outperformed the growth and quality investment style by a significant margin while beating the largecap Nifty index by a healthy margin as well. We believe these themes will continue to deliver strong returns over the medium term and recommend allocation in these strategies.
Post Q4FY21 results and significant upgrades across the sectors, our estimates have also seen upgrades by 8 percent. This is primarily driven by upgrades in the metals and mining sector which has seen robust results and high metal prices. Our December 2021 Nifty target has also been upgraded to 17,400 (22x FY23E earning). Overall, we remain constructive on the market and believe the dips should be utilized to build positions in the recommended themes.
Currently, we are expecting 31 percent earnings growth in FY22, normal monsoon and the Covid free festive season (fully functional economy) will be the biggest trigger in our FY22 expectation, any dent in the triggers could be downward pressure on the earnings growth.
The first half of CY21 was an exciting period for the primary market as Rs 39,000 crore of funds were raised through IPOs. Do you think the second half will be the same? What could be the total fund-raise during the period?
The overall improved sentiments in the secondary market were the biggest driver for higher activities in the primary market during FY21. This brings recovery in the IPO market where new promoters were rushing to tap the opportunity. The recent spate of IPOs and their success clearly indicates appetite for mid and smallcap stocks.
Further, the success of the recent IPO in FY21 in which four-five IPOs subscribed more than 100 times has boosted the overall confidence in the primary market, which is supported by improved liquidity and overall risk appetite. With the opening up of the economy, investors were looking for new ideas and IPOs were the best opportunity to fulfil the growing interest in mid and smallcap companies in FY21.
We believe the current market environment is conducive for the primary market, with this, the IPO market will continue to stay active in the current calendar year.
Covid cases are inching up again in some parts of the world, signalling the possibility of a new wave. Do you expect a lockdown-like situation in the coming period? Will it disrupt the economic and business cycle?
Covid risk is not over yet. India has been able to arrest the rapid spread of the second wave through means of localised and regional lockdowns. As we study the Covid-19 curve, challenges will continue to persist and faster vaccination is the only permanent solution. In our opinion, vaccinating a significant part of the population will take around five-six months.
If vaccination continues at the same pace then the disruption in the economic and business cycle will be less, any delay will be a near-term risk.
Midcap and smallcaps have outperformed the benchmark indices, so far, in 2021. Do you think the momentum will continue in the second half of CY21 as well?
Mid and smallcaps led the show in the first six months of 2021, outperforming all the major asset classes. The broader market regained flavour in the second half of 2020, this was followed by prolonged weakness in midcap and smallcap universe for 2018 and 2019. This performance has continued in 2021 also. In the first half of 2021, the broader market has emerged as the show’s topper.
From a valuation perspective, midcaps look attractive against largecaps. Historically, midcaps traded at a 45 percent premium to largecaps during the bull phase of 2017. The recent spate of IPOs and their successes clearly indicate an appetite for mid and smallcap stocks. Our case for two-year-rolling returns indicates the market has turned in favour of small and midcap stocks, which are more reasonably valued and offer greater upside potential.
Which are the emerging themes that one should be looking at now?
The outlook for the entertainment, especially hotels, leisure sector, has improved in the last one month with ease in restrictions. A large number of people were stuck at home due to Covid 1.0 last year and Covid 2.0 this year, now they want to get out of home and (are) ready to explore destinations. Hotels and leisure are the categories that can absorb the demand immediately. With an increase in the pace of vaccination, we could see more demand for these activities.
Unlock trade will be interesting this time. In the previous unlock theme, automobiles were preferred first then consumer discretionary. This time it will be different as the pent-up demand varies across sectors. Major pent-up demand is in travel and leisure space, which will likely pick up with the unlocking of the economy.
We could see revenge spending in small ticket discretionary sectors like apparel, footwear, restaurants, travel and hospitality.
Do you think FY22 earnings performance will be much better than FY21? Do you expect more upgrades than downgrades after Q1FY22 earnings?
FY21 Nifty EPS grew by 15 percent to 534. The pandemic year turns out to be the best year in terms of corporate profitability. We are expecting the Nifty earnings growth of 31 percent / 13 percent in FY22/23.
Post-strong Q4FY21 earnings, the consensus further upgraded its earnings estimate (around 5 percent) with significant upgrades coming in the metals and mining sector. Interestingly, even after the imposition of lockdowns in Q1FY22, earnings for the BFSI sector have seen marginal upgrades in the last two months. The BFSI sector is seeing a good number of upgrades in its corporate book because of rising commodity prices but retail, SME and MSME sectors are experiencing intense pressure on account of lockdowns.
We believe the lockdown challenges are more likely to manifest in lower credit offtake instead of a serious increase in NPAs. However, consensus expectations continue to remain high and some disappointments are likely. Management commentary stands critical.
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