Harshad Borawake of Mirae Asset Mutual Fund
The equity market returns can be decent, given the strong earnings growth momentum and Nifty valuations at 19x forward P/E, which is not expensive, Harshad Borawake of Mirae Asset Investment Managers India says in an interview to Moneycontrol.
Mirae Asset continues to be bullish on the pharma sector as US price pressure normalises to its historical levels. “As cost inflation cools off, we would see a positive impact on the margins,” says Borawake, who manages Rs 8,348 crore worth of funds.
The research head and senior fund manager, seasoned for more than 17 years across industries like financials, oil and gas, logistics and aviation, says consumption has always been an important part of Mirae’s portfolio. The consumption sector’s steady earnings growth delivery helps it to perform better during volatile markets, which has been the case in the past one year, he says.
Excerpts from the interview:
Do you think the large positive returns in equity markets in next 12 months looks difficult considering the current global mood?
The current uncertain environment is emanating more from the global front, while the domestic demand still appears to be strong. Globally, the growth seems to be tepid and at the same time central banks are still hawkish in the context of higher inflation. Going ahead, this dynamics is likely to change as slowing growth will eventually lower inflation thus providing room for central banks to focus on growth.
For India, the returns can be decent given the strong earnings growth momentum and Nifty valuations at 19x forward P/E, which is not expensive. Also, the credit growth revival coupled with return of urban demand after two years of pandemic induced slowdown augurs well. Elevated crude oil prices remains a risk though.
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Do you think IT stocks will not underperform from hereon as it has enough selling pressure since the start of this calendar year?
The key concern in the IT emerges from the global demand outlook. However more than 20 percent underperformance captures that to a large extent, especially given that margins have likely bottomed out. Also, global volatility could result in increased INR volatility which should benefit the sector.
While sector dynamics of strong cash generation, high return on equity (RoE), higher payouts along with valuations close to 5-year average imply better risk-reward now, but near term performance will still be a function of incremental order wins.
The second quarter corporate earnings season begins. Do you expect this season to be better than the first quarter?
In the forthcoming quarter, aggregate numbers may hide earnings quality. Based on the Bloomberg consensus numbers, aggregate Nifty earnings are likely to be flat, weakness is entirely concentrated in commodities and oil marketing companies. Excluding them, earnings growth is likely to be more than 20 percent supported by strong topline growth.
Further, within sectors the domestic oriented ones like autos, banks, industrials are likely to report very strong topline and bottomline growth.
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Are you confident enough to say the inflation has peaked out globally including India with fall in commodity prices?
Inflation, as we know, essentially has two components – demand and supply. With regards to demand, globally there seems to be some slowdown, while in India demand is picking up, but the recovery is still quite nascent.
The uncertainty lies from the supply side, especially on the oil front. While the commodity prices have fallen from the peak during the last six months, the recent OPEC decision to cap oil production, indicates, we have not seen the end of it.
Do you see any possibility of 10-year bond yields going above 8 percent in coming months?
The fund houseviews: 10-year yield has exhibited strong resistance in 7.50-7.60 band in the face of ongoing global and domestic rate hike cycle, so far. With global commodity prices having softened considerably from current year peak, crude oil remaining below $ 100 a barrel and with RBIs inflation projections not showing anyway runaway spike combined with continued buoyancy in GST and direct taxes, it seems presently that current range should hold.
With market expectation of terminal repo rate in current cycle around 6.50 percent, considering a spread of 100bps, again the range of 7.50-7.60 looks sustainable.
In case of any adverse development or in a knee jerk reaction, yields may inch higher towards 8 percent levels. However, it is not expected to sustain, assuming current macro environment prevails.
Do you think the pharma is making itself ready to gradually march towards its record high?
Pharma sector had outperformed Nifty by 12 percent in 2020 (since start of pandemic), on account of being a direct beneficiary of the Covid and also as investors rushed towards safety during this uncertain period.
However since then it has underperformed the Nifty by ~16 percent, mainly weighed by concerns of US pricing pressure coming back to haunt the industry and raw material and other cost inflation impacting margins for the sector.
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We believe US price pressure are normalizing to its historical levels also as cost inflation cools off we would see a positive impact on the margins. Hence we continue to remain constructive on the sector.
Are you betting big on consumption theme?
Consumption has always been an important part of our portfolio. Consumption sector’s steady earnings growth delivery helps it to perform better during volatile markets, which has been the case in the past one year.
Consumer discretionary demand, too, has benefited from broadbased healthy growth in wages across industries (cyclical recovery). Further, listed companies have gained market share from unorganised owing to challenging business environment (disrupted supply chains). Furthermore, recent broader decline in commodity prices has improved the sector outlook (margin expansion) led by better pricing power.
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