Neeraj Chadawar is the Head – Quantitative Equity Research at Axis Securities
Banking space is likely to deliver decent returns in this calendar year, while a sharp reversal may be seen in BFSI stocks after the market volatility settles down as the outlook for the sector has significantly improved over the last few quarters, says Neeraj Chadawar, Head – Quantitative Equity Research at Axis Securities in an interview to Moneycontrol.
The ace equity strategist says top-tier banks are well placed in terms of the overall asset quality and improvement in operational matrix. This is a good time to step up allocation towards top-tier private banks with a perspective of two to three years, Chadawar shares.
Excerpts from the interaction:
Do you think equity has seen a decent correction, given the multiple issues the market is facing like inflation, geopolitical tensions, oil price surge, and policy tightening?
In the medium term, geopolitical development and the other macroeconomic factors like inflation, oil prices, bond yields, and Fed decision on the interest rate trajectory will be the key events that will drive the market performance.
Volatility will continue to be on a higher side before we arrive at a concrete direction. It is likely to go down and settle below the long-term average as soon as we enter into a rate hike cycle, and the trajectory for an actual number of rate hikes projected for 2022 will be known to the market. The second half of 2022 is likely to be more stable compared to the first half.
Investors should focus on asset allocation and use this volatility to build long-term positions in quality large and midcap stocks as they become attractive after the recent correction and provide a good entry point. The Russia-Ukraine conflict has allowed the investors to increase the exposure under-allocated equity holders, as the long-term prospects for the equity market remain intact.
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We continue to hold a positive long-term view on the market supported by the emerging favourable structure as increasing capex spending enables banks to improve credit growth. Moreover, the overall boost in the Union Budget 2022-23 expenditure will help deliver broad-based growth in FY23. We maintain our December 2022 Nifty50 target of 20,200, valuing it at 22x FY24E earnings.
What kind of returns do you expect from markets in the next 3-5 years?
We look at India’s growth prospects that continue to be very strong in the post-pandemic world. India is likely to be among the fastest-growing economies in the emerging market basket in the next three to five years. The Indian economy is in better shape, especially the Indian banking system, in which the trend has improved significantly on the asset quality front which led to the visibility of improvement in profitability.
Adding to that, corporate earnings remain resilient in FY22 to date irrespective of the fact that markets have seen two waves of COVID-19 in the current fiscal. Cumulative and rolling net profit of NSE 500 universe in last four quarters has touched an all-time high level (crossed Rs 9 lakh crore in Q3FY22). Moreover, loss-making sectors have turned positive and contributed significantly to net profitability over the period. Return on Equity (ROE) for the broader market, too, is improving after a muted performance for several years.
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Overall, the Indian market has entered into an upcycle of earnings with an expectation of 20 percent Nifty EPS CAGR growth over FY21-24, which was in a single digit of 7 percent over FY09-21. We believe the market will likely follow the double-digit earnings growth in upcoming years.
What are the long-term implications of current geopolitical tensions-led inflation concerns, supply worries, and so on?
Oil prices had crossed the $ 100 a barrel mark very recently and continue to stay volatile. This could be a negative factor for global trade posing a downside risk to the global economic growth. A scenario of oil sustaining above $ 100 a barrel for some more time will create notable challenges to the oil-importing countries, especially India, which may find it difficult to maintain the trade deficit and the foreign exchange reserves.
The rise in crude prices could also delay the cool-off in inflation in the domestic market, which was expected to be moderate in the second half of 2022.
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Rising crude prices will add an upside risk to the current inflation expectation for the remaining part of the CY22. This will lead to a further rise in raw material prices, and that would impact the margin pressure for the Indian corporates.
Demand scenario remains robust for the current quarter in which 46/50 Nifty companies manage to beat or are in line with the expectation on the revenue front. This is likely to firm up further in the upcoming quarter with the opening up of the economy and government spending.
The earnings momentum would be the critical factor for the market performance. While it has been strong in the past few quarters and largely in line with expectations for the current quarter, at this juncture, the visibility in the corporate earnings remains intact.
In terms of private consumption, a lot of companies are already facing margin pressure and now it is due to price shocks triggered by the Russia-Ukraine war.
Indeed. We see inflation as a big theme. Value-focussed sectors are more inflation proxies and tend to do well in rising inflationary scenarios, and we are likely to see a good amount of allocation happening in the next one to two years in value-focussed sectors.
Overall, commodities as a space will continue to do well, especially metals and mining, and agri commodities look attractive. The banking space looks attractive, and an increase in government CAPEX spending will increase the credit growth for the banking system.
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We are going to witness challenges with the consumption basket, especially in a large ticket discretionary where the demanding challenge is clubbing with the rising raw material cost.
We believe one needs to be selective in this pocket in the near term, and there is still a scope to make a good amount of money in this space with bottom-up stock picking.
What is your take on large banks and financial shares that corrected sharply in the recent past?
The banking space could deliver decent returns in the current calendar year. Sharp reversal could be expected in BFSI stocks, which got impacted due to the present volatility as the outlook for the sector has significantly improved in the last few quarters.
The positive structure emerging with an increase in capex spending will enable banks to improve credit growth, and the overall increase in the budget expenditure in FY23 will help deliver broad-based growth moving forward.
Going forward, the demand for the working capital is likely to go up as the nominal growth expectation is reasonably strong. The outlook on the net interest margin looks positive, based on that, the earnings growth for overall BFSI space is likely to be robust. In overall space, the top-tier banks are well placed in terms of overall asset quality and visibility of the improvement in the operational matrix. We could see an improvement in ROE for top-tier banks in upcoming years. This is a good time to increase allocation towards top tier private banks with a perspective of two to three years.
After last year’s rally, broader markets have seen sharp corrections. Do you think there could be more correction ahead or it is time to rebuild a portfolio with beaten-down good names?
The ideal investment strategy in the current environment, I feel, would be focused on fundamentals and recommended to remain invested in the market as the long-term story for the Indian market remains intact. Adding to that, this Russia-Ukraine conflict has allowed the investors to increase the exposure to one who is currently under-allocated in the equity.
Large-caps will find an edge in the short term: We believe the style and sector rotation has been the key factors to achieve satisfactory returns.
The quality theme may outperform the broader market from the current levels considering a notable market correction and significantly increased volatility in the last three months. Quality stocks would provide superior long-term risk-reward in the current environment marked by a notable increase in volatility in the last two weeks, and hence large-caps will find an edge over the broader market for the short term. Once the heat between Russia-Ukraine settles, value is likely to emerge in the small and mid-cap space, providing attractive investment opportunities in the broader market as the earnings outlook remains constructive.
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