Reliance Securities ED & CEO Lav Chaturvedi says the spike in coronavirus cases can derail the momentum in business activities but is unlikely to have a significant impact as faster vaccination can contain the spread of the virus.
He thinks corporate earnings, which were a pleasant surprise in nine months of FY21, will only get better in the new financial year. In an interview to Moneycontrol’s Nishant Kumar, he talks about the risks for the market, earnings expectations for FY22 and sectors to buy in. Edited excerpts:
Rising coronavirus cases may derail the pace of economic recovery. How big is this risk for the market?
Certainly, any substantial rise in COVID-19 cases can potentially derail the pace of momentum in business activities, which has already dented investors’ sentiments in domestic equities.
Ironically, a sharp rise in new cases in Maharashtra, which contributes over 13 percent to India’s GDP and about 20 percent in the country’s industrial output, is a matter of worry for now.
While it is still premature to predict the quantum of impact on corporate earnings, we believe impact should not be significant. Given the experience of the year 2020, the spread can be controlled without putting large-scale business restrictions.
Additionally, a faster vaccination process can be helpful in containing the spread of the virus.
Other than COVID-19, what is the biggest threat for the market in the short to medium term?
A sharp rebound in the dollar index, reversal of interest rate scenario globally and domestically gap in both, execution of Budget initiatives and growth targets, would be the biggest threats, in our view.
Earnings in FY21 were more hits than misses. Do you think FY22 will be better?
While corporate earnings certainly surprised in nine months of FY21, mainly led by a sharp rebound in business activities with phase-wise opening-up of economy and cost deflations enjoyed by the companies, FY22E is expected to be substantially better than FY21E despite cost inflations and the recent spike in COVID-19 cases.
In our view, a strong pick up in capital expenditures in FY22E, impact of new reforms announced in the Budget to stimulate consumption as well as investment activities and allocation of higher capital expenditures in select large state’s Budget for FY22E should continue to support the ongoing rebound in corporate earnings.
As per our in-house view, Nifty earnings are poised to record about 35-40 percent growth in FY22E.
Which sectors, in your view, will report better earnings in Q4FY21?
It's difficult to access it as of now. However, looking at current trends and a sharp pick up in construction activities, infrastructure, industrial and building materials, including cement, may potentially report healthy numbers.
Additionally, pick-up in real estate markets and improved volume and steady pricing of metal companies may reflect in sound earnings.
However, given the recent pronouncement of the apex court, we believe banks and NBFCs earnings might be impacted in Q4FY21 due to possible reversal of compound interests for moratorium period and higher provisioning out of proforma NPAs. Further, slippages for the industry are expected to be high.
Which sectors look most attractive to you for the medium to long-term?
Given increased clarity about asset qualities of banks and NBFCs especially after Q4FY21 earnings and an expected pickup in credit in FY22E, we believe banking and NBFCs can potentially outperform the market in the long run.
Further, industrials, infrastructures, building materials, select automobile and cyclical can do better as there are direct beneficiaries of pick up in capital expenditures and economic rebound.
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