Daily Voice | Two underperforming sectors can turn out to be dark horses in 2022, says Siddhartha Khemka of Motilal Oswal
Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, recommends that investors buy into the current downturn in the stock markets because it’s been proven repeatedly that equity is the best asset class in terms of long-term returns.
Defensive sectors like pharmaceuticals, IT and consumer will likely make a comeback until sentiment improves, Khemka told Moneycontrol in an interview. There could be near-term volatility, given the uncertainty around the new variant of the coronavirus, said Khemka, who has more than 15 years of experience in fundamental equity research including institutional, retail and wealth platforms. Edited excerpts:
Q: Is the market expected to correct more in the coming months, after falling more than 8 percent from a record high?
After touching a record high on October 19, 2021, the Nifty has corrected over 8 percent, led by various global factors including the US Federal Reserve’s taper announcement, rising bond yields, higher crude oil prices and strengthening of the US Dollar Index. A big fundraise in the primary market also put some pressure on the secondary market.
Sentiments were further battered across global equity markets on November 26, with the detection of a new Covid-19 variant – Omicron – in South Africa. This resulted in risk-off sentiment, with the markets correcting by 2-3 percent globally, easing bond yields, and a 11 percent fall in Brent crude prices. India’s VIX (volatility index) rallied 25 percent to 20.8.
Since these are early days for the new variant, limited information regarding its transmission and impact is available… We expect the Centre and state governments to remain proactive, given their experience from the second Covid wave in April-May 2021. However, we expect the market to witness elevated volatility in the near term, given the uncertainty around this new variant.
Q: What are your broad expectations from the Monetary Policy Committee that is scheduled to meet during December 6-8, especially when investors expect two rate hikes in the US in 2022? Do you expect any hint about a change in the accommodative policy stance?
As against the general market expectation of a hint in the Reserve Bank of India’s communication towards normalisation of monetary policy (including a hike in the reverse repo rate), the forecasts and announcements made on October 8 seemed rather dovish. Overall, the commentary by the MPC on October 8 points to only a gradual reversal of its expansionary monetary policy and not until the economy visibly gets back in shape.
Q: What could be behind the significant sales by foreign institutional investors in the equity market?
Primary market activity in India was quite elevated in CY21, with a bunch of new-age companies (Zomato, Nykaa, Policy Bazaar, Paytm) raising capital. More than Rs 1 lakh crore has been raised in CY21 YTD, which is higher than Rs 67,000 crore raised in 2017.
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Thus, while the primary market saw net FII investments of Rs 66,500 crore in CY21 YTD, the secondary market saw net outflows of Rs 18,700 crore. In addition, given India’s sharp outperformance to global markets and valuations turning expensive, many foreign broking houses like Goldman Sachs, Morgan Stanley, UBS, Nomura and CLSA downgraded India equities as the risk-reward turned unfavourable.
Q: Is it the time to turn cautious on the equity market and shift focus to other asset classes?
On the domestic front, the economy is witnessing a sustained pick-up post the opening up and the festive season, with several high-frequency indicators crossing pre-Covid levels. Corporate earnings in Q2FY22 were better than our expectations despite sharp input cost inflation impacting several sectors. Earnings projections for the Nifty remain stable at Rs 730 and Rs 873 for FY22 & FY23 (growth of 35 percent and 19 percent, respectively, after delivering 15 percent growth in FY21) – strengthening our belief in the resumption of a new earnings cycle.
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Even the valuation after the pullback at ~20x FY23E Nifty EPS is relatively reasonable now. India managed the second Covid wave in April-May with local restrictions and without implementing any national lockdowns, unlike the first wave in early CY20. We expect a similar approach should the need arise going forward. Thus, we would recommend investors buy into this pullback as it has been proven time and again that equity is the best asset class in terms of returns over a long-term period. We expect sector rotation in the markets to continue and defensives like pharma, IT, and consumer to make a comeback till sentiments improve.
Q: What key themes are you betting on for 2022 and why?
The long-term fundamentals remain intact and thus one should adopt a bottom-up strategy as we expect stock/sector-specific momentum to continue. IT, consumer, cement, capital goods and real estate are some of the sectors which would continue to report strong numbers.
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IT: We expect tech spending to remain a critical enabler for enterprises to transform in preparation for the new normal. Indian IT companies expect native cloud applications to continue to be major growth drivers over the long term.
Consumer: With the opening up of the economy, discretionary consumer spending is picking up strongly. India is one of the largest consumption-driven economies in the world and the sector has benefited from demographic advantages, leading to strong demand.
Capital goods: With the opening up of the economy, the capital goods sector is witnessing strong traction due to a) healthy order inflows across companies, b) rising execution levels in key projects, c) improving liquidity situation, and d) spending by the Central government.
Real estate: We believe real estate is on the cusp of an upcycle with support from several macro factors like low interest rates, benign prices and rising affordability, coupled with low home ownership in India.
Cement: We maintain our positive view on the cement sector as we expect an improvement in the demand scenario, led by government infrastructure activity and a pick-up in demand from the real estate sector.
There is also scope for some of the undervalued sectors which can see some recovery in business as well as market interest. Banking and auto are two such sectors that have underperformed the market so far but have the potential to turn out to be dark horses in 2022.
Banks reported a healthy performance on improved business growth and asset quality trends, resulting in an earnings beat across most of the sector. We expect this growth momentum to continue as economic activity recovers, further aided by the festive season. Along with the low cost of funds, this would support margins.
In the case of auto, the semiconductor shortage as well as the intensity of commodity cost inflation are expected to improve from 2HFY22. We prefer four-wheelers over two-wheelers on the back of strong demand and a stable competitive environment.
Q: Do you expect the IPO market to continue to do well?
The primary-market activity which began in July 2020 continued its exciting journey in 2021 as well. More than 50 companies came out with IPOs in 2021 so far, having raised more than Rs 1 lakh crore cumulatively, the first time that fundraising through IPOs has breached the Rs 1 trillion mark in a single calendar year. Such excitement was last seen in 2017 when firms raised Rs 67,147 crore through 36 IPOs.
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The highest fresh capital this year was raised by new-age companies like Paytm (Rs 18,300 crore IPO) and Zomato (Rs 9,375 crore IPO). In fact, Paytm was the biggest IPO ever, surpassing Coal India which had raised Rs 15,200 crore in 2010. Given the broad-based rally in the secondary market and the overall positive sentiments that is prevailing, the primary market, too, seems to be taking advantage of this buoyancy.
The humungous liquidity flows and good listings by many IPOs instilled confidence in investors for IPOs. The momentum is likely to continue as many IPOs are still lined up in December as well as next year. It includes one of the biggest IPOs in India – that of Life Insurance Corporation of India, followed by the National Stock Exchange – expected to come by early next year. Further, many more new-age companies are likely to come up with IPOs in the coming months including Oyo, Pharmeasy, Delhivery, MobiKwik and Ixigo.
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