Within midcaps/smallcaps space, focus as an investor should be on buying businesses, which have 1) sustainable competitive advantage (moat), have 2) limited leverage (strong balance sheet) and are 3) capital efficient in nature, Pankaj Pandey, Head– Research, ICICI Direct Research Desk, ICICI Securities said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) In the run up to Diwali 2020, the government released two stimulus packages to boost growth and revive the investment cycle. Do you think that is enough?
A) The third tranche of the Atmanirbhar Bharat package has focused on the key facets of the economy including the labour market, stressed sectors, social welfare, manufacturing, housing, infrastructure, exports, and agriculture.
The underlying factor for most of the measure is on job creation and aiding the severely impacted MSME segment.
One can easily gauge that focus on PLI schemes in sectors such as Auto ancillaries or demand push to the real estate which is a direct/indirect employer of a large population.
It will be myopic to call it “enough” or “short of expectations” because while the tail of the pandemic continues, the corporate earnings have shown resilience.
We do expect the measures like this to come in a few more tranches. The pace of economic recovery, however, will be the key monitorable.
Q) Which sectors are likely to benefit the most from the stimulus packages unveiled by the Government in the run up to Diwali 2020?
A) Measure such as income tax relief for developers and homebuyers to increase the differential rate between circle rate and agreement value to up to 20% will likely benefit Tier-1 cities, developers, to clear their inventory.
Similarly, the PLI scheme for auto ancillaries could be a meaningful opportunity for some players as well as other manufacturing-based sectors mentioned therein.
Subsidy announcement of Rs. 65,000 crore for fertilizers is likely to help rural & agricultural sectors
Q) What is your message to investors for SAMVAT 2077? Outlook for markets
A) We continue to remain constructive on Indian equities given our resilient economic setup and the strong recovery that our corporates have reported so far.
After the sharp rise in large caps, we expect the broader market to participate in the rally. The stock-specific action is expected to continue wherein we continue to like IT, pharma, private banks, and rural economy linked business models.
Q) Which sectors likely to hog the limelight in SAMVAT 2077?
A) Given the sharp up move in the large caps, we expect broader market participation to begin from here on. We expect small-caps and mid-caps to be the area of focus for the next Samvat.
However, within midcaps/smallcaps space, the focus as an investor should be on buying businesses, which have 1) sustainable competitive advantage (moat), have 2) limited leverage (strong balance sheet), and are 3) capital efficient in nature.
Q) FIIs have turned aggressively bullish on Indian markets especially in November which powered Sensex, and Nifty to record highs. Do you think the trend will continue?
A) The markets have surpassed the pre-Covid peaks primarily tracking near-normal economic activity domestically and incremental positive news flow on Covid vaccine development.
It is pertinent to note that FII flows (~US$4 billion in MTD November 2020) has been strong. One of the reasons has been faster than expected corporate earnings recovery and the management commentary that we had during Q2.
In case the economic recovery is consistent, we do not see India not being a key beneficiary of the incremental flows which has also been aided by a strong position as one of the dependable alternatives for the “China plus One” policy.
Q) Markets hit fresh record highs but MF data suggest that SIP are still falling off. Do you think some of the retail investors have missed the bus who have stopped their SIPs? How are you analyzing the data?
A) As per AMFI data, the total number of SIP accounts has increased consistently from 3.14 crore in April 2020 to 3.37 crore in October 2020. So the overall the trend of new SIP registration continues despite higher market levels in FY21 so far.
However, the total monthly contribution from SIP has decreased from Rs 8376 crore to Rs 7800 crore from April 2020 to October 2020. The SIP discontinues ratio (number of SIPs discontinued compared to newly registered) in FY21 has increased to around 70% compared to 58% in FY20.
It indicates that while the new SIPs continue to rise, few existing investors have stopped or discontinued their SIPs to either book profit, or investors who entered in FY20 (less than 1 or 2 years old) may be exiting as they recoup their capital.
On the other hand, total monthly inflow into equity schemes was at its highest in March 2020 at Rs 11723 crore, when markets corrected sharply.
Thereafter, the inflows have reduced as markers recovered and now we are witnessing outflows since last 4 months.
It clearly shows maturity among retail investors wherein they invested at lower levels and are actually on side-lines or not investing or marginally redeeming at higher levels.
Q) Economic recovery is visible at least on paper and Moody’s recent commentary on India’s GDP confirm the sentiment. Do you think economy-linked sectors will be the winners in the near future?
A) We continue to believe that macroeconomic recovery will entail a strong contribution from all the facets be it credit, infrastructure, manufacturing, or services.
Manufacturing which was one of the soft elements of the economy is likely to get a big push, going ahead. One should also note that the corporate tax rate cut in September 2019 was announced with the twin objective of the revival of domestic capex cycle as well as bringing the tax rate on par with global peers to attract global capital.
Interestingly, the advent of Covid-19 and global backlash against China have put India into a sweet spot for an alternative global manufacturing hub as other countries strive for a reduction of dependence on China.Disclaimer
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