Pankaj Pandey, Head – Research at ICICIdirect feels India is on course to reporting better than the projected 9.5 percent growth (by IMF and RBI) in FY22. However, he believes recovery pace will also be determined by impact of the third wave if any.
Pandey expects more earnings upgrade in Q2FY22. “We stem confidence from the management commentary which is optimistic on the demand recovery as Covid spread is abated and vaccination picking up pace domestically.”
The Q2FY22 or July-September quarter earnings season will begin from the month of October.
“Post Q1FY22 results, we have changed our FY22E earnings growth projections. For FY22E our revised Nifty EPS stands at Rs 685 versus Rs 675 earlier; i.e. an upgrade of 1.5 percent. We now expect index earnings to grow at a CAGR of 25.7 percent versus 24.2 percent earlier over FY21-23E,” said Pankaj Pandey who has over two decades of experience in the equity market.
Q: Do you think GST collection, e-way bill generation, and peak power demand is pointing towards better-than-anticipated economic rebound. Does it mean India will report more than 10% growth in FY22?
It is pertinent to note that all three indicators have hit or gone beyond the pre-Covid levels, which clearly reflects better than economic rebound post second wave. GST collection for July 2021 (received in August 2021) stood at Rs 1.12 lakh crore that was up 30 percent on YoY basis. Compared to pre-Covid levels (August 2019), the same was up 14 percent.
For August, 2021 peak power demand at 184.4 GW was above pre-Covid high of 181.1 GW recorded in February 2020. E-Way bill generation for September began on a strong note, reaching 1.1 crore. If we compare this to the average bill generation in the months prior to Covid-19 (October 2019-February 2020), it has reached around 114 percent levels of the average 5.5 crore bills.
In terms of growth, we are on course to report better-than-projected around 9.5 percent growth (by IMF and RBI) in FY22, however, we believe recovery pace will also be determined by impact of third wave (if any).
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 hereon? Kindly explain?
While, traditional metric of P/E, Market Cap to GDP etc. is traditionally used to gauge the market valuation levels, it is pertinent to note that Nifty constituents have undergone major change in past decade and hence current and forward PE multiples have shifted to higher orbit. The weights of capital efficient sectors such as FMCG, Financials (private banks), IT and Pharma have increased.
Similarly, more new age companies have come in (and will come in future) where valuation metrics focusses on larger horizon market share capture than traditional 1 or 2 years forward P/E. Thus, the traditional metrics have been rendered less useful. So while, those parameters might term markets expensive, we see decent value across pockets in the medium to long term.
Q: At current market levels, what are those pockets where you can put your hard-earned money now and why?
As a structural bet in the market, sectorally, our preference would be towards IT (driven by increasing digital spends), capital goods (capex-linked recovery amid benign interest rates) and CRAMs oriented pharmaceuticals/chemical space (benefeciary of China+1 move).
Q: Do you expect more earnings upgrade in Q2FY22 and why? Have you changed your FY22 earnings growth projections?
Yes, we do expect more earnings upgrade in Q2FY22. We stem confidence from the management commentary which is optimistic on the demand recovery as Covid spread is abated and vaccination picking up pace domestically.
Post Q1FY22 results, we have changed our FY22E earnings growth projections. For FY22E our revised Nifty EPS stands at Rs 685 versus Rs 675 earlier; i.e. an upgrade of 1.5 percent. We now expect index earnings to grow at a CAGR of 25.7 percent versus 24.2 percent earlier over FY21-23E.
Q: Auto sector 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?
Changing technology landscape (electrification), shortage of chips and gradual easing of state specific lockdowns are a confluence of factors resulting in underperformance in the auto space. We are selectively positive on certain pockets particular companies which are readily adapting to the technology shift.
In the ancillary space we are positive on pockets which have minimal disruption from electric vehicle (EV). Among the segments, we are most positive on the commercial vehicle space, given that the cyclical bottom is behind us and growth capex underway by both public as well as private sector enterprises.
Q: Nifty Midcap100 and Smallcap 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?
Covid has aided the consolidation of organised space across space. Furthermore, we have lot of companies cutting their flab in terms of wasteful expenses, apart from forced cut in costs (be it travelling and administrative etc.). We have also seen a lot of balance sheet improvements during the period, aided by improved working capital, fund raise, monetisation etc.
Thus there has been structural improvement in business metric across the sectors which has culminated into superior valuation multiple. Keeping these into mind, we do see pockets of value across the space. Most importantly, we see businesses from a prism of 3-5 years. Thus, we remain constructive on Indian equities in medium term, notwithstanding near term blip/consolidation.
Q: Realty (up 21 percent) and IT (up 28 percent) were star performers in 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?
With supply side favouring the big players with strong balance sheet, coupled with lower cost of capital and land bank access, we expect the consolidation in the real estate industry to continue. Going forward, with leaner balance sheets, we believe that top listed developers will continue to invest in growth and gain market share. We also see price hike as obvious outcome (already seen across many markets) given the commodity price rise, which will ease the pressure on profitability.
On the IT front, IT services companies reported strong growth in Q1 and few companies also upgraded their revenue guidance for FY22, which is a reflection of continued large deal wins across client spectrum. The pandemic has accelerated need for digital transformation especially on the cloud side and we expect deal momentum continue to be strong for a medium term. We believe that clients should continue to hold the stocks and in fact any minor corrections should be seen as a buying opportunity.
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