Daily Voice | Market is likely to consolidate till Budget and UP polls, says Mohit Nigam of Hem Securities

Market Outlook

Investors should tighten their seat belt to brace for a short-term turbulence in the form of volatility in Indian equity markets, triggered by a host of domestic and overseas factors, suggests Mohit Nigam, who is the head of PMS at Hem Securities.

The market is likely to consolidate till the Union Budget 2022 as there’s no major event in the next couple of months, other than elections in some states, the seasoned financial professional with exposure in capital markets across forex, equities, bonds and investment banking shares in an interview with Moneycontrol. Excerpts from the interview:

The September quarter earnings season is in its last lap. What is your reading on the corporate performance?

I think the overall results have been above expectations backed by opening up of the economy. The IT sector in particular announced good results with strong deal momentum and aggressive hiring, majorly led by a robust demand environment. At the same time, the sector faces supply-side challenges and rising attrition. The banking sector also gave good numbers as growth is seen in advances and asset quality also improved during this quarter with decline in gross NPA (non-performing assets). Manufacturing faced pressure on operating margins because of a rise in commodity prices.

The results of 46 Nifty companies have been announced so far and recorded a 12.05 percent jump in sales as compared to Q1FY22. Small-cap companies gave maximum sales growth of 18.77 percent QoQ as compared to large-cap and mid-cap companies. We believe that companies from chemical, electric vehicle, new-age IT sector in mid and small cap space will continue to outperform large-cap companies in the coming quarters.

Overall, we are bullish on the market and believe that any significant dip is a good opportunity to accumulate quality stocks.

Have you seen any big risk hinted by the September quarter earnings? What are the other risks that you see for the investors?

In the backdrop of the ravaging second COVID wave, the September-quarter results of most companies have been impressive. The opening up of global markets and increase in domestic demand have favourably affected the Indian economy. Positive outlook on the Indian economy can be seen in the performance of the indices.

Investors need to be cautious in the short term due to high valuations. After a heavily liquidity-driven market in this quarter, investors should tighten their seat belt for a short-term turbulence in the form of volatility in Indian equity markets.

Both domestic and foreign factors will affect the market. A rise in COVID infections in Russia and China have started threatening us. Then there is a continuous rise in crude oil and coal prices which are pushing inflation and ultimately affecting input costs.

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Huge sell-off has been seen and this trend is likely to continue in the short term. Policy stance of global central banks, especially the US Federal Reserve, will play a key role in determining the future of global indices.

Going forward, investors should look for companies with sound fundamentals, good revenue growth and low debt levels and should avoid going for index-wide returns. Overall, the market is bullish and long-term investors should not be worried.

Would you suggest any sector or theme that one should consider for portfolio recast after the September quarter earnings season?

I would like go sector by sector to answer this question.

Electric Vehicles: Electrification is the biggest emerging trend in the automobile industry. According to a report by Ricardo, Battery Electric Vehicles (BEV) are averaging 46 percent growth between 2015 and 2020 and are expected to post deeper market penetration with a CAGR of 36 percent between 2020 and 2025. Our top picks in this sector include Sona BLW and Tata Motors.

Private Space Technology: Prime Minister Narendra Modi has recently launched the Indian Space Association (ISpA). It is an industry body made up of space and satellite companies from the Indian space domain. ISpA will act as the collective voice of the Indian space industry. ISpA will support the government’s vision of Atmanirbhar Bharat while also becoming a leader in space technology. It will be an independent, single-window agency that will open up the Indian space sector to private companies as well as start-ups. The current space industry is about $ 360 billion but India’s presence accounts for only about 2 percent of it. ISRO says it has the potential to capture 9 percent of the global market by 2030. This is where the organisation could step in. It will work to engage with stakeholders, policies and also build relations with the international space industry. Various sectors such as agriculture, transport, urban development and the weather department now want space technology and data to grow their business and develop future strategy. Our top picks in this sector include MTAR Technologies.

Banking: The banking sector had seen a sharp decline in business activity owing to lockdowns, especially in April and May 2021. However, trends from July 2021 show faster return towards normalisation, especially on the asset quality front. Most lenders have indicated an improvement in collections with the unlocking of the economy. Loan growth, however, has not seen a meaningful improvement in the first half but we expect that in the remaining half year credit offtake may be seen in agriculture, retail and MSME segments. Other than this, credit growth can be seen in housing loans, consumer durables and unsecured credit amid festive season. Asset quality is expected to improve as collections are looking up with operations of on-field staff getting back to normal. Our Top picks in this sector include ICICI Bank, Axis Bank and Bajaj Finance.

Do you expect the market to consolidate now?

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Yes, the market seems to consolidate now as it sees no major event over the next couple of months. Many industries are facing inflationary pressures due to rising pump prices of the transport fuels. The transport fuels are available at Rs 100 despite the cuts in the excise duty and VAT. Also with the signals of tapering from the US Fed, markets are expected to see some downward pressure, hence markets might move into consolidation zone.

The elections in Uttar Pradesh are of significance to the central government as it holds the majority of the seats in Parliament. The acceptance of BJP in UP will boost the position of the ruling party and might help markets gain positive momentum. The results are expected around February-end or March first week – till then the markets will consolidate.

Do you think macros and micros both are firing on all cylinders?

On the macro front, fiscal deficit in September 2021 stood at Rs 5.26 lakh crore or 35 percent of budget estimates which is significantly lower due to higher advance and indirect taxes and is much lower than same month previous year when it rose to 114.8 percent as a result of higher expenditure by the government for COVID-19 relief package stimulus.

We believe that with a surplus cash balance with the RBI, this can lead to higher capital expenditure or reduced borrowing by the government in the coming months. India’s retail inflation, which fell to 4.35 percent in September, is likely to be impacted by the rise in food and crude prices. PMI Manufacturing for October 2021 stood at 55.9, up from 53.7 in September and 52.3 in August. It seems that the manufacturing activity is on an expansionary trend after hitting a bump in July when the index was below 50.

With the economy opening up and new orders coming in domestically as well as internationally, there is input purchasing in anticipation of improvement in demand. PMI Services for October rose to 58.4 from 55.2 in September, marking a ten-and-a-half-year high despite companies increasing the prices of their products due to expensive raw materials, clearly indicating that the third quarter of the current fiscal year may witness high economic growth.

Merchandise exports for August stood at $ 33,277 million up by 45.72 percent YoY led by petroleum products, pearls, precious, semi-precious stones. Merchandise imports for August stood at $ 47,086 million up by 51.73 percent from $ 31,033 million in August 2020 led by petroleum crude and gold. Unemployment rate stood at 7.75 percent in October – up from 7 percent YoY and 6.9 percent MoM. We are awaiting macroeconomic data for this month which will be released this week.

The Business Confidence Index for September stood at 124 up 80 percent over the last year. Driven by an improvement in sentiments for all the four components of the BCI, namely ‘overall economic conditions will improve in the next six months’, ‘financial position of firms will improve in the next six months’, ‘present investment climate is positive as compared with six months ago’, and ‘present capacity utilisation is close to or above the optimal level’.

The narrowing of business sentiments between large firms and small firms indicates a more even shaped recovery in the coming quarters compared to the uneven one we are witnessing. We are certain that the overall growth outlook is positive, however, investors should be cautious as globally many American and European countries are battling the pandemic on top of semiconductor shortage, soaring freight charges, etc.

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