Gaurav Dua, Head – Capital Market strategy & Investments, Sharekhan by BNP Paribas said the data of five occasions in the past two decades indicated that midcaps/smallcaps tend to see a sharp correction post an all-out rally of 12-18 months.
“Midcaps/smallcaps have strongly outperformed largecaps in the past 14/15 months. Thus, in the near term, one needs to be selective as the phase of an all-out rally and easy money in broader markets could be behind us,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
On the automobiles sector, Gaurav Dua said they continued to be underweight as the sector is facing the double whammy of moderation in demand as well as disruption in supply of critical components (especially electronic components). So he advised that it would be better to stick to original equipment manufacturers (OEMs) with a relatively high export contribution.
Q: Do you think GST collections, e-way bill generation and peak power demand point towards better-than-anticipated economic rebound? Does it mean India will report more than 10% growth in FY22?
Recent monthly economic data shows an encouraging uptrend in consumer demand and pick-up in industrial activity. Clearly, the economic impact of the second wave is quite limited as compared to the first wave of the pandemic. However, the services sector continues to struggle and the same was visible in the Q1 FY2022 GDP data. The services sector, accounting for 58-60 percent of the economy, continues to lag due to the Covid-related restrictions in place. RBI projections put GDP growth estimates at 9.5 percent for FY2022. To exceed expectations, the government needs to push capital expenditure. Additionally, if by vaccination and other measures the country is able to avert the possible third wave, the pace of revival in services sector could also pick up and take GDP growth rate into double-digit territory in the current fiscal year.
Q: The market consistently hit fresh record highs. What are those parameters which clearly indicate that market looks expensive in terms of valuations and the markets has more room to rally from here on?
A large part of the rally is driven by expansion in valuation multiples, supported by better-than-expected surge in corporate earnings, ample liquidity and a decline in the risk-free rate (fall in sovereign bond yields driven by accommodative monetary stance). With the rising inflationary trend and possible tapering of bond-buying driven cash infusion in global financial markets by the US Federal Reserve, there is limited scope for expansion in valuation multiples from here.
However, the market could still continue to offer double-digit returns in line with the expected strong growth in corporate earnings in FY2022/2023. Also, the markets always offer stock-specific investment opportunities.
Q: At current market levels, what are those pockets where you can put your hard-earned money now and why?
Our portfolio strategy is built on being overweight two key investment themes: 1) Play on economic growth revival in India; 2) Export-driven businesses. The domestic economy is projected to grow at 9.5 percent in FY2022 and 7-7.5 percent in FY2023. The policy framework to revive the capex cycle through production linked incentive (PLI) scheme, National Asset Monetisation Plan, incentives for renewable energy along with low interest rates is likely to help core industries like steel, cement, construction and corporate lending banks to do well over the next few years.
On the other hand, the economic upcycle in Europe, the US and other major regions globally along with the China+1 policy can put many export-focused companies in sectors like auto ancillaries, engineering, textiles & apparel, IT services, pharma, specialty chemicals, etc on the high growth path.
Q: Do you expect more earnings upgrades in Q2FY22 and why? Have you changed your FY22 earnings growth projections?
After upgrades in earnings estimates for three consecutive quarters (Q2-Q4 FY2021), the recent Q1FY22 result season saw some moderation in estimates for FY2022 to account for the impact of the second wave of the pandemic. However, earnings estimate for most companies remain stable or seen some upgrades for FY2023.
Going ahead, any material change in earnings estimates can come from banks, depending upon the trend in asset quality. Some banks have given guidance of moderation in gross NPA additions in Q2 and a meaningful improvement in the second half of the year.
Q: The auto sector was hit badly in the last three months. What are major reasons behind it and how long this underperformance will continue? Is it the time to pick auto space or should one wait for some more time?
We continue to be underweight on the automobiles sector as it is facing the double whammy of moderation in demand as well as disruption in supply of critical components (especially electronic components). So it would be better to stick to original equipment manufacturers (OEMs) with a relatively high export contribution such as Bajaj Auto or explore to attractive exports focused plays in the auto-ancillary space.
Q: Nifty Midcap100 and Small-cap 100 indices posted gains for 14th and 9th consecutive month respectively. Do you think the outperformance to Nifty will continue in coming months as well, and why?
Midcaps/smallcaps have strongly outperformed largecaps in the past 14/15 months. However, if you consider data for the past 5/6 years, the Largecap index, Nifty/Sensex, has actually given higher returns as compared to Midcap/Smallcap index. Second, the top 250 companies still account for 85 percent of the total market capitalisation of Indian equity markets today, which is still much higher than average of around 80 percent seen over the last decade. Thus, there is still scope for midcaps/smallcaps to outpace largecaps over the next few years. Especially since profits of smaller niche companies tend to grow at faster pace in an economic upcycle.
Having said this, midcaps/smallcaps tend to see a sharp correction post an all-out rally of 12-18 months (five occasions in the past two decades). Thus, in the near term, one needs to be selective as the phase of an all-out rally and easy money in broader markets could be behind us.
Q: Realty (up 21%) and IT (up 28%) were star performers in the last three months. What is the reason behind their rally? Do you think it is the time to book profits in these sectors or one should keep holding the same?
In case of realty, the sector seems to be coming out of a long consolidation phase and the outlook for next few years seems to be positive. Affordability has improved significantly given the stagnant real estate prices for 8/9 years and low interest rates. In addition, demand is likely to surge with significant salary hikes in IT services and new age businesses. Hence, as an investor, one needs to have some exposure to realty sector in investment portfolio.
In case of IT services, the Covid-19 pandemic has significantly improved the demand environment for the sector. The Indian IT services sector seems to have moved on to a higher growth orbit for the next few years. A lot of the optimism is already reflected in valuations and returns could be relatively more moderate from here. But it would still be quite healthy and likely to be better than returns in the Nifty/Sensex over the next couple of years.
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