Sachin Shah, fund manager at Emkay Investment Managers, says Q2 results have been quite decent in terms of top line (volume) growth and indicate that demand-side drivers are intact.
After the September quarter earnings, the worst of commodity price inflation has probably peaked and the worst could be behind us, he told Moneycontrol in an interview. The only “joker in the pack” is crude oil prices, which are still significantly elevated, said Shah, who has over two decades of experience in the Indian equity markets. Edited excerpts:
SIP inflow remained strong above Rs 10,000 crore for the second consecutive month in October. Do you expect the SIP flow to remain above that mark in the coming months?
I believe so. Low penetration of equities as an asset class (less than 15 percent of financial savings; less than 10 percent of India’s population invests in equities) and very low yields on fixed-income assets (bank FDs, debt funds) have probably triggered the much-anticipated and awaited secular/regular/consistent/disciplined allocations to equities by retail savers of the country.
What’s your reading on the September quarter earnings? Have you seen more upgrades than downgrades?
The Q2FY22 results season has, by and large, been quite decent, at least in terms of top line (volume) growth, which clearly indicates and demonstrates that demand-side drivers are intact and kicking. Nevertheless, some of the sectors have witnessed some squeeze in profitability due to raw material (commodities), logistics (fuel) and resources (salaries) inflation galloping over the last couple of quarters. Broadly, there have been few downgrades and a large part of the universe has not seen any significant changes in earnings estimates for FY23.
Have you seen any big risk from the September quarter earnings season? What are the other risk factors that one has to be aware of now?
As mentioned earlier, clearly inflationary trends are quite starkly visible across sectors and companies. But the silver lining is many international commodity prices (steel, non-ferrous metals, coal, iron ore, shipping freight rates) have begun to cool off quite significantly due to the slowdown (regulatory driven) in China.
From that perspective, in all probability, the worst of the inflation driven by commodity prices has peaked out and in all likelihood the worst is behind us. The only joker in the pack is oil prices, which are still at significantly elevated levels ($ 80+ per barrel).
Have you spotted sectors/themes to consider for portfolios now or continue holding in portfolios after the September quarter earnings season?
Sectors like auto & auto ancillaries, pharma & healthcare, industrials, logistics, BFSI (banking, financial services, and insurance), consumer products and domestic outsourcing should perform over the next 2-3 years.
Do you expect strong earnings growth in banking from the third quarter, considering the current credit growth trend and asset quality factor?
Retail credit, agri and micro, small and medium enterprises (RAM) are the three areas that have delivered credit growth over the last few years and they still seem to be showing no signs of slowing down. The private capex cycle over the last 5-7 years has been quite muted, resulting in lower corporate and industrial credit. But it seems it’s getting out of the consolidation phase and factors like PLI (production-linked incentive) schemes and China+1 export opportunities are going to play the role of catalyst in driving industrial credit demand.
The other important trend over the last 5-7 years has been the cleaning-up of banking balance sheets, resulting in very low incremental credit cost for at least the next few years.
Clearly, higher credit growth and low credit cost expenses should enable higher profit for banks over two-three years.
Do you think both macros and micros are firing on all cylinders?
So, the last few quarters’ developments at the corporate level, government policy level and overall ground-level demand, both in rural and urban India, are pointing towards an all-round economic recovery and corporate earnings growth. Recent high-frequency data indicators are all encouraging.
In the recent quarter, there were some more affirmations (double-digit export growth) and geopolitical developments (China+1 and China GDP slowing down), leading us to believe the potential for India’s manufacturing and exports is about to be unleashed and will probably turn out to be a multiyear, high-growth story for the Indian economy.
Over the last few quarters, we are witnessing a sharp economic recovery. Most of the high-frequency lead indicators are suggesting a strong rebound in economic growth:
1) E-way bills issued per day for Q2FY22 at 21.24 lakh have witnessed a two-year CAGR (compound annual growth rate) of 12 percent. Even for Q1FY22, when strict lockdowns were observed across the country, e-way bills issued per day stood at 16.9 lakh, a number equal to Q1FY20.
2) Railway freight per month for the first five months of FY22 stood at an average of 112.5 million tonnes, a 3.5 percent growth over the similar period in FY20 and just a 3.4 percent decline over H2FY21.
3) GST collections for H1FY22 averaged Rs 1.13 lakh crore, a two-year CAGR of 6 percent over H1FY20. In all likelihood, the central government is likely to exceed its GST revenue target for FY22 by 10-11 percent.
4) Credit growth has also improved meaningfully at 6.8 percent YoY in Q2FY22 versus 6 percent in Q1FY22 and material improvement from a bottom of 5.1 percent in Q1FY21.
5) We have also witnessed a very strong profit trajectory for the majority of the listed companies over the last 3-4 quarters.
6) Profitability of the corporate sector is also reflected in around 23 percent CAGR in corporate tax collections (Rs 1.7 lakh crore till August 2021) over the last two years. Even personal income tax collections have grown at a CAGR of 9.7 percent in YTDFY22 over the last two years.
(We have made all comparisons over FY20 to show a more normalised picture. H1 of FY21 was completely marred by nationwide lockdown)
Most of these indicators make us believe India Inc. is entering a virtuous cycle of multiyear profit growth over the coming 3-5 years.
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