Daily Voice | LIC IPO key to revised disinvestment target and FY22 fiscal deficit numbers: Amnish Aggarwal of Prabhudas Lilladher

Market Outlook

Prabhudas Lilladher is cautiously optimistic about the stock market. Near-term headwinds such as rising crude oil prices, geopolitical uncertainty following the Russia-Ukraine crisis, and a slowdown in rural demand are a passing phase until the Indian markets decouple from the global markets, Amnish Aggarwal, director of institutional research, told Moneycontrol in an interview.

Aggarwal said the Life Insurance Corporation of India initial public offering, expected in March, will be key to the revised disinvestment target and the FY22 fiscal deficit. Edited excerpts:

The broader markets fell the most compared to benchmarks in the current correction and consolidation. Along with the Nifty 500, the broader markets fell below the 200-day moving average. Is it time to be more cautious and will there be a significant correction in the coming months?

The Nifty has corrected by 8 percent from the peak, but the rout in individual stocks in mid-caps has been of much higher proportion. We are cautiously optimistic. Although near-term headwinds like rising crude, geopolitical uncertainty following the Russia-Ukraine crisis, and a slowdown in rural demand remain, we believe it is a passing phase till the Indian markets decouple from the global markets.

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While we don’t rule out a bounce-back, the bear case scenario could be another 5-7 percent lower than current levels.

Ukraine-Russia tensions continue to weigh on the global markets. Is it a bigger risk for equity than inflation and Fed tightening?

The Ukraine-Russia risk seems unmeasurable at this point in time. While the markets can anticipate the Fed tightening and trend, we don’t know the extent and direction of the Ukraine crisis.

Given that both military superpowers (the US and Russia) are at loggerheads on this issue, if the dispute blows out of hand with NATO coming into the picture, it has far bigger implications for global security and growth.

The equity benchmarks are about 8 percent lower from their record highs touched on October 19, 2021, but capital goods and power indices have outperformed every other index in this period. What is the reason for their outperformance and would you advise investing in both segments?

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Power and capital goods have underperformed the markets for the past many years. Power stocks are value stocks and there has been a shift in the market from growth to value stocks, which has given some tailwinds to power stocks.

Capital goods stocks are outperforming due to hopes of a capital expenditure cycle revival led by rising capacity utilisation, the capex plans of steel, cement, and electronics industries, the Rs 2 lakh crore productivity-linked incentive scheme, and the likely benefits of the China+1 strategy. Given the expected growth outlook, we expect sustained outperformance from the sector.

Do you expect private capex to pick up strongly in FY23?

Given the reasons cited above, we believe India is on the verge of revival in private sector capex, which would last for the coming 3-5 years. We expect the pick-up to start happening from the second half of FY23.

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Which sectors can play a major role in the economic recovery in the coming years? Should investors add those segments to their portfolios?

India is a consumption-driven economy, but we believe there are significant tailwinds from housing/real estate, industrial capex revival, and sustained infra sector capex led by government initiatives. We are positive on capital goods and infrastructure as a turnaround sector.

Banking stocks will benefit from the broad-based economic recovery, the capex cycle revival, and improved balance sheets… We are also positive on auto, metals and select consumer discretionary segments.

Will Indian equities decouple over the next 3-6 months? And as a result, could the benchmark post-double-digit gains by CY22?

We expect the Indian markets to decouple over the coming 3-6 months, once some of the headwinds play out. We have given a year-end Nifty target of 18,441 as a base case. However, double-digit gains seem uncertain as of now.

Is the LIC IPO crucial for the Indian economy, given the widening fiscal conditions?

The budget had given a fiscal deficit target of 6.8 percent… We believe the LIC IPO is key to the revised disinvestment target and FY22 fiscal deficit numbers and will go a long way in improving the cashflows and spending power of the government.

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