Devang Mehta, Head – Equity Advisory at Centrum Wealth, says the long-term trajectory for the markets looks promising, with earnings and the economy on an upward curve and liquidity and sentiment being positive. Capital expenditure seems to be returning and more companies are optimistic, he told Moneycontrol in an interview.
India seems to be on the cusp of an all-round recovery in terms of economic expansion, said Mehta, a finance professional with over 16 years of experience. He is bullish on 4Fs: financialisation, formalisation, fiscal expenditure by the government and private capex, and farm income growth. Edited excerpts:
Q: Most key corporate earnings have already been announced. What is your broad view on the earnings season?
As the second-quarter earnings season approaches its fag end, there is a possibility of more upgrades than downgrades. Most of the earnings of India Inc. have been ahead of expectations.
The technology sector has seen strong revenue growth along with robust guidance for the near future. Even mid-tier IT companies registered their highest ever growth this quarter.
Private sector banks saw steady recovery in loan growth as well as recovery and upgrade in asset quality. On the asset quality front, slippages remained elevated, which was along expected lines, but were lower than the Q1FY22 levels. Most banks reported a decline in gross and net non-performing asset ratios on account of higher recoveries/upgrades during the quarter.
All NBFCs saw sharp improvement in disbursement and collection efficiencies (close to pre-Covid levels). Autos suffered due to raw material price inflation. Cement was more or less inline but higher operating costs due to high energy and freight costs had its impact.
Consumer and retail growth got a big boost with the gradual opening up of the economy. Increase in mobility due to fewer Covid cases and the acceleration in the pace of vaccination led to a strong pick-up in discretionary consumption.
Commentaries across sectors on demand scenario and improvement in supply-side constraints augur well on the earnings front, going forward. On the downside, raw material inflation led to significant gross margin pressures for a lot of companies despite taking aggressive price hikes.
Q: What are the key pockets where you can find value now and why?
India seems to be on the cusp of an all-round recovery in terms of economic expansion. The four themes we have been bullish on since some time are the 4Fs: financialisation, formalisation, fiscal expenditure by the government and private capex, and farm income growth.
One has to cherry-pick some great businesses out of these four broader themes. Some sectors that qualify as part of these are top private banks, financial intermediaries, strong NBFCs, insurance companies, building materials, cement, consumer discretionary and non-discretionary, pharma, diagnostics, healthcare, agro and specialty chemicals, select capital goods, automation and technology companies.
Q: Has the bull run in India just started and is there a long way to go?
There’s an old saying that the bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. There can be arguments about which stage of the bull market we are in.
People look at how the markets rose from the Covid lows of 2020. But is it the right approach? Over the last 10 years, the returns on the index level have been higher single digit to lower double digit.
Bull markets typically end with extremely high returns for over a five-to-eight-year period, which is not the case here.
On the fundamental side, we never had such a strong combination of macros and micros both firing on all cylinders. Look at the macros like GST collections – an unprecedented Rs 1.3 lakh crore – direct tax collections shooting out of the roof, rising real estate sales, confident consumer behaviour, acceleration in vaccination and reduction of Covid cases. Migration of unorganised to organised, corporate balance sheets being delivered, and the beginning of a new capex cycle stand out as earnings drivers for listed companies.
Most importantly, the appetite from Indian high net worth individuals and retail for ownership of equities seems to be on the way up. Total 70 million demat accounts and the quality and quantity of primary paper in the market finding acceptance and getting absorbed also augurs well and is a sign of rising investor interest.
Some risks for India will be crude moving up even from these levels and crossing $ 100 dollar per barrel, a slew of large IPOs sucking out liquidity in the shorter term, inflationary and interest rates rising too soon and too much, but most of these are known to the market.
Q: With a flood of IPOs coming up, should one focus on all of them, including fintech and startups though they are making losses? What are the key factors one should consider before subscribing to an IPO?
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You shouldn’t invest in an IPO just because the company is garnering positive attention. Extreme valuations may imply that the risk and reward of the investment is not favourable at the current price levels. With a large number of IPOs lined up for the coming months, calendar 2021 is believed to be a record year for investing in IPOs in India.
If one revisits 2007/2008, the fresh issue component of the average IPO was around 93 percent and 7 percent was offer for sale, whereas in 2021, this is now 40 percent fresh issue and 60 percent OFS.
It is very important to check how the proceeds raised from the IPO will be used. The magnitude of the opportunity and the company’s capacity to capture market share can make all the difference when it comes to growth and shareholder returns.
It is important to take a look at the promoters, who play a key role in all its operations and functions. One should also check the valuations because the offer price may be undervalued, fairly valued or overvalued, depending on the industry parameters and profitability ratios. Reading the risk factors is vital to ascertain if there are any major concerns or risks associated with the company.
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Some of the new-age or future-ready companies have been tapping the primary market in the last couple of years. Some of them have been able to carve a niche for themselves and win shareholder trust despite higher valuations on the back of consistent growth and profitability.
However, there seems to be a new market emerging for a number of platform companies, fintechs and startups. One reason for this is that these companies are household names and the average age of new demat account holders is 29. Younger people are more likely to invest in tech-led firms.
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Q: What do the current market cap-to-GDP ratio and PAT-to-GDP ratio indicate? Will private capex pick up pace in the coming months?
India has been among the best-performing emerging markets. The market-capitalisation-to-GDP ratio hovering around 115 percent (FY22E GDP) is above the long-term average of 80 percent and is the highest since 2007, when it touched 149 percent. This ratio is also called the Buffett Indicator. A number above 100 is generally termed to be expensive. It means that any adverse factor like global headwinds and earnings disappointment can lead to some profit booking.
But with earnings and the economy both on an upward curve and liquidity plus sentiment being positive, the long-term trajectory looks promising. Capex, which was the biggest missing link till now, seems to be coming back with more corporates sounding positive and optimistic.
Q: Can the actions of central banks including the US Federal Reserve and inflation worries cause consolidation in the Indian equity markets in the rest of FY22?
Prices of more goods and services are increasing in a manner not seen for decades. This inflationary spike, accompanied by actual and feared supply shortages, is powering both consumer and producer anxiety. Policymakers at central banks in the UK and the US have started to move away from the narrative of ‘transitory’ inflation.
This can be one of the risk factors which can have short- to medium-term repercussions and lead to volatility in the markets. However, all central banks, including the Federal Reserve, have done well to prepare economies and markets. The Indian markets, after a spectacular run, can consolidate for a brief period. Ebbs and corrections after such a fast and furious rally should be good for the health of the markets.
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