Gautam Duggad, Head of Research at Motilal Oswal Institutional Equities, believes cyclical sectors like cement and auto could do well, going ahead, given the underlying economic recovery, focus on capex and infra creation. The auto sector seems to be bottoming out after three years of downturn, he added.
Duggad, who has over 13 years of experience in Indian equities, heads a team of 40 analysts at Motilal, covering 17 sectors and more than 220 stocks. After starting his career as a key account manager at P&G, he moved to equity research. He joined Motilal Oswal in 2012 as a consumer analyst.
In an interview with Moneycontrol’s Kshitij Anand, he said he expects BFSI sector to continue to do well in FY22. Here are edited excerpts from that interview:
Q) After the initial sell off by FIIs seen in the first week of March, things seem to be stabilising now? Which phase of the bull market we are in?
A) It is tough to make such short-term judgments. Markets seem to be digesting the recent gains and waiting for the next triggers.
Earnings were solid and commentary was optimistic as well. Growth rebound in the economy, as well as earnings, augur well from a medium-term perspective.
Q) The financial year FY21 is coming to an end and Nifty50 has rallied by about 30%. What really stood out for you in the last 12 months?
A) Following things stood out:
The resilience of Corporate P&Ls:
Despite the unforeseen challenges and lockdowns, Nifty earnings are expected to post 15% growth in FY21 - best in the last five years.
Balance sheet/cash flow improvement:
Corporates have deleveraged balance sheets across the board and cash flows have been very healthy, too
Big becoming Bigger:
Across sectors, market share and profit pools shifted in favour of largecap companies.
FY21 was characterised by sector rotation. 2HFY21 has seen the return of cyclical and value stocks after a long time.
Q) Where do you see indices heading in the next financial year. Do you have any target for Sensex, Nifty?
A) We don’t have index-level targets. However, it won’t be too far-fetched to say that the markets will now broadly track the underlying earnings growth. We don’t expect significant valuation re-rating from here.
Q) Small & Midcaps came into limelight in FY21, do you think the momentum will continue in FY22 as compared to largecaps?
A) We do expect mid and small caps to continue to do well as the economy recovers further post vaccination and more segments of the economy open up.
However, not all mid and smallcaps will participate. Only companies with healthy business models, strong balance sheets, leadership positions in their segments, and durable competitive advantages will do well, in our view.
Q) Any event or risks which investors should watch out for in FY22?
A) Here are the following events which investors should watch out for:
- Re-emergence of COVID and consequent lockdown remains a risk.
- Sharp spike in bond yields could cap equity valuations. If there is any reversal RBI stance on accommodative monetary policy, it can impact equity valuations.
- Global geopolitical risk may also impact sentiments.
Q) Which sectors will hog the limelight in FY22 and why?
A) We expect the BFSI sector to continue to do well in FY22. Asset quality has turned out better than expected and large-cap BFSI companies are sitting on PCR’s of 70-80%.
Their capital ratios are robust with Tier-1 in the range of 15-17%. Recovery in the economy can help drive credit growth at the margin. Also, valuations still have room to expand as RoE accretion happens in FY22.
Aside of BFSI, we expect other cyclical sectors like cement and auto to do well given the underlying economic recovery, focus on capex and infra creation. The auto sector seems to be bottoming out after three years of downturn.
Q) Are there any vaccine plays which investors could look at in the next 6-12 months?
A) Contact-intensive sectors like retail, hotels & multiplexes can be the obvious vaccine plays. Even consumer staple plays can benefit if urban consumption recovers and people start coming back to offices (on-the-go consumption of impulse food, processed foods items, detergents, Quick Service Restaurant plays)
Q) Do you think more retail investors will join D-Street in FY22? They made it clear that the new age investors are well informed and know about the products.
It is possible that retail participation can continue to remain upbeat in markets. Only risk to this argument is elevated volatility and frequent drawdowns in the market.
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