DAILY VOICE | Hemang Jani of Motilal Oswal sees value in these 4 sectors

Q: Do you think expected Fed tapering will have less impact on the domestic market going forward given the forex reserve India has?

Fed tapering is likely to have less impact on the domestic market as India's forex reserves provide that kind of buffer, which could insulate India from its impact. Further the long term fundamentals of the economy remains strong. Government has taken various measures which has helped the economy to sail through the pandemic and control inflation. Infact through various policy measures, Government is trying to push for investment driven growth by announcing various capex across industries over last 18 months.

Further, FII flows have been too less this year. It stood at around Rs 50,000 crore in 2021 so far (both primary and secondary markets combined) as compared to more than Rs 1,70,000 crore in 2020. So we should participate in the global rally till more stringent tapering starts.

Q: Looking at the consistent rally to new record high levels, the market seems unstoppable. Do you think it is time to turn cautious? Can the Sensex hit 60,000 milestone by end of 2021?

Equity markets have been consistently rallying over past 18 months with bouts of volatility in between. Continuous delivery of earnings by corporates has boosted investors' confidence. Even Q1FY22 results have been in line with the elevated expectations. Management commentaries across the board indicate an improvement in the demand environment post June 2021, led by the easing of restrictions and sharp reduction in active Covid-19 cases.

The pace of vaccination has picked up – average daily doses in August stand at 5.2 million doses per day versus 4.3 million doses per day in July. Amid the likelihood of a normal monsoon season, we expect corporate earnings to recover as economic activity picks up and pace of vaccination accelerates further. We are overall positive on the earnings growth for FY22/FY23 and expect 36 percent/18 percent YoY growth in Nifty EPS. However, amidst the buoyant sentiments, elevated activity in primary markets, Nifty valuations at 21x 12-month forward EPS remain rich and thus consistent delivery on earnings expectations going ahead become crucial. Therefore, we believe index could perform in line with earnings growth.

Q: Considering the stellar rally in the equity market, do you think it is the time to reduce exposure to equity in a portfolio or rebalance the portfolio?

Over the years, it has been proven that equity remains the best return generating asset class as compared to others. Thus, rather than reducing exposure to equity, the investors should focus on asset allocation and build a diversified portfolio to navigate through any volatile or correction phase. One should keep on reviewing his portfolio from time to time and churn it from overheated stocks to more comfortable names as per his investment style. The long term view continues to remain positive, though it could be very volatile, given risk of 3rd wave of pandemic, commodity linked inflation, high earnings growth expectation leading to rich valuation.

Q: Is the market ignoring risks like spread of delta variant, geopolitical tensions etc?

Despite the rise in new Covid variants, equity markets continue to surge on the back of low base effect and reopening of the economy. India's anti-covid vaccination drive has gathered good momentum in August 2021. In-fact, India has managed to cross the threshold of administering over 10 million vaccine doses in a single day over last few days. The spread of the pandemic appears to have been contained as the number of active cases are currently around 3,66,000, except for a few states like Kerala, Maharashtra, and West Bengal, which are contributing 80 percent of the total active cases in India. Daily new cases have fallen from a peak of 4,00,000 cases per day in May 2021 to around 40,000 cases per day in August 2021. The positivity rate continues to remain below the 5 percent threshold and currently stands around 2.1 percent.

Major states have started reopening up schools, malls, and other recreation facilities, with the focus now shifting to supporting economic growth and normalizing lives, as the number of cases continues to remain under control. Vaccine manufacturers have indicated higher availability from September 2021 onwards, which is likely to result in ramping up of the vaccination drive. Even Management commentaries across the board suggest an improved demand environment post June 2021, led by the easing of restrictions, lower active Covid-19 cases, and a pickup in vaccinations. Amidst the buoyant sentiments, elevated activity in primary markets, Nifty valuations at 21-22x 12-month forward EPS remain rich and thus consistent delivery on earnings expectations going ahead become crucial. So in the event of any major disappointment on the earnings front, there could be volatility risk.

Q: What are those sectors where value investing principle of Warren Buffett can be applied now and why?

BFSI, IT, Metals and Cement are some of the sectors where we believe value investing principle can be applied.

Cement: Cement sector is very well placed for a strong upcycle over the next few years with the revival in economy, robust demand in housing and other infrastructure projects. We expect 10 percent volume CAGR over FY21-23E, which should improve industry clinker utilization to over 80 percent (and over 85 percent in North and Central India). Eastern India, with around 25 percent capacity growth over the next 18 months, is the worst placed and is thus our least preferred region. With an improving demand outlook, we prefer companies that: a) are moving down the cost curve, b) have the potential for market share gains, and c) provide valuation comfort.

BFSI: We expect a gradual recovery in the growth momentum as economic activity recovers, which, along with a low cost of funds, would support margins. Fee income should witness improving trends. Collection efficiency is showing a steady improvement over June-July 2021 and will enable moderation in the slippages run-rate from 2HFY22. The restructuring book remains controlled. Banks are carrying an additional provision buffer, which should limit the impact on credit cost. We continue to remain watchful of the asset quality outlook in the near term.

IT: The IT industry is seeing a big change, with technology emerging as the cornerstone for large enterprises. Two themes are driving growth in the industry: (1) digital transformation and (2) cost control through increased automation. Managements remain confident of achieving double-digit revenue growth going ahead on the back of a strong deal pipeline around cloud, data analytics, cybersecurity, automation, and AI. Thus, we expect tech spends to remain a critical enabler for enterprises to transform in preparation for the new normal. Some of this has been factored into valuations as stocks trade at a significant premium to its historical P/E multiple. We feel the re-rating is justified, given the sector’s resiliency and better-than-expected recovery.

Metals: The strong rally in steel prices is likely to sustain on account of the following factors: (a) strong demand recovery in metal consuming sectors across the world; b) focus on de-carbonization in China, leading to production cuts; c) the Chinese government discouraging steel exports by way of removal of export rebates; d) higher raw material prices such as iron ore, coke, and coal; and e) temporary export tax imposition by Russia to discourage steel exports. On the other hand, aluminum prices would be supported by improved demand for the metal, production cuts in China, and the cap on capacity expansion leading to a market structurally in deficit over the next 2–3 years. While there are temporary headwinds in demand from the Automotive segment due to the semiconductor shortage, the worse is likely behind. While deleveraging would remain the key focus for companies, they are also eyeing growth, which would lead to higher capital expenditure.

Q: Banking and Financial Service indices gained 16-17 percent in 2021 so far. Is it the right time to enter into these sectors and should one stick to largecaps only?

After bearing the brunt of the pandemic over 1HFY21, demand revived in 2HFY21, with retail disbursements back at pre-Covid levels or even higher in certain segments. Collection efficiency also saw sharp improvement, resulting in controlled restructuring/slippage. Given the wide opening up of the economy and strong pick up in the vaccination drive across the country, we expect the business momentum to pick up and estimate credit cost to normalize from FY22, resulting in earnings recovery over FY21-23E. We expect loans for private banks to grow 16 percent/18 percent over FY22E/FY23E and loans for large NBFCs to grow around 12 percent. BFSI stocks though have moved 16-17 percent in 2021 so far, they have still underperformed the Nifty. However this has also presented an attractive opportunity for active stock selection. Therefore, we focus on lenders with high earnings delta, a stable growth outlook with a competitive advantage, strong balance sheets and reasonable valuations.

Q: Do you think Mr Market is a great teacher for traders and investors? What are the great lessons you learned from Mr Market in your journey in the equity market?

Yes, the Market is a great teacher for traders as well as investors. Every day, it teaches something new to both novices as well experienced investors. Based on ones learning one needs to keep on evaluating his investing strategy and change accordingly. One great learning so far has been that while emotions may move the prices in any direction in short term, it is the value of the business and earnings delivery that set the price over the long term. Thus investors should not get fazed by the ups and downs in the short term and should invest keeping long term picture in mind.

Superior management quality, consistent earnings delivery and fair corporate governance will always pay off in the long run. Secondly, it is very important to be disciplined in the market whether one is a trader or investor and should learn from its previous mistakes and avoid repeating that.

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