Mayuresh Joshi, Head of Research – Equity, William O’Neil India, said if the lockdown continues beyond the first quarter, we might have to relook FY22 numbers.
Joshi has over 16 years of experience in Indian financial markets. Prior to joining William O'Neil India, Mayuresh had a 12-year long stint with Angel Broking as Senior Vice President, Head of Portfolio Management Services.
In an interview with Moneycontrol's Kshitij Anand, Joshi said as India resets along with the global economy over the next few months, we would witness the reposition of the faith by the FIIs in the long-term demographic and structural story that the Indian economy has to offer. Edited excerpts:
Q) The mayhem caused by the second wave has already fueled worries of a complete lockdown to stop the surge seen in the daily COVID cases – something which is not factored in by the markets. Do you think we could retest 12000 on Nifty in case lockdown becomes more stringent?
A) There are plenty of states which have either initiated partial or complete lockdowns of different time durations to break the transmission chain of the virus.
The estimates and assumptions of the first quarter were hit both in terms of lower earnings for the corporate sector and partial shaving of the annualized GDP forecasts.
Global markets have largely held on with the US economy firing on all cylinders but inflationary concerns across the developed markets are leading to profit booking across these markets as well.
The risk factor for our markets is thus dual- a) if global markets keep on sliding downwards it can cause investors both local and FIIs to churn into safe-haven assets; b) if the lockdowns continue longer than estimated it may eventually lead to a downgrade of earnings and lowering of the risk premia towards Indian equities.
The next few weeks are crucial for equities as an asset class as any of these factors can potentially create a downside risk for the markets.
Q) S&P has already slashed India's GDP growth forecast to 9.8% for this fiscal. Do you think a downgrade could also be in the offing? What impact will it have on markets?
A) A lot of rating agencies have shaved off GDP estimates on an annualized basis. The presumption here is that the first quarter hit would largely be compensated by a strong recovery in the second half though the overall number would be lower than what was envisaged at the beginning of this fiscal.
Monsoons are expected to be normal, vaccinations should hopefully speed up in the next few months and the supply chains for corporates along with their functioning within state rules, which have not been disrupted this time round, puts the emphasis on earnings holding out rather than being a complete washout as seen in last year's lockdown.
On the macro front, our bebt/GDP is very manageable compared to a lot of economies across the globe (including the developed nations having a debt/GDP in excess of 100%), RBI is doing a commendable job in keeping the interest rates stable. Inflationary pressures, with the recent print on retail inflation coming at 4.29%, is expected to edge downwards and oil prices expected to move in a range.
Exports have seen good traction and even the current deficits would remain in check and as tax collections, both direct and indirect have shown stability, it lends to believe that efficiencies would hold out albeit the disruptions created in the first quarter.
My belief is that a downgrade would not be in the offing. The recovery envisaged would be taken back for the disruption caused this quarter but the second half should assist in bouncing back very smartly.
Q) FIIs turned net sellers in April after 6 months. Is it rise in COVID cases or is there something else that might have spooked foreign investors?
A) First of all, Indian and global equity markets have performed phenomenally in the past year. Based on all the macro factors discussed above, along with the government’s intent of pushing on capital account spending places India as a differentiated bet within the emerging and developing market space. The rise in Covid cases and the disruptions caused as discussed in the aforesaid points might be one of the reasons but these would be temporary in my opinion.
As India resets along with the global economy over the next few months, we would witness the reposition of the faith by the FIIs in the long-term demographic and structural story that the Indian economy has to offer.
The rise in COVID cases, inflationary concerns in the west, geopolitical flare-ups might cause short-term volatility in the markets but the longer-term outlook remains pretty stable and solid for Indian equities.
Q) What are your view on earnings growth? After steady April – we could see a muted June on a QoQ basis at least if not on a YoY basis. Do you see further downgrades to the earnings trajectory in FY22?
A) A lot of concerns are being played out on the economy facing sectors with some overhang being seen on how vehicle demand will play out for shutdowns, price increases on Autos, whether the Banking/NBFC space might see asset quality pressure, and fewer disbursements causing pressure on NIM's and spreads, Real estate tapering off and so on and so forth.
Earnings would get hit on some factors above but the overall functioning still continues and the momentum on a quarter-on-quarter basis is definitely going to come off and create adjustments on an annualized basis but the optimistic hope remains on a stronger recovery in the second half.
So, we do not see a substantial downgrade in the earnings. The risk factor, however, is if the lockdowns continue beyond the first quarter for an elongated time period, , we might have to relook FY22 numbers.
Q) What is your view on the Cryptoindex?
A) It is really how the regulators and Governments across the globe are viewing the acceptance of this mode of payment. Blockchain technology has many advantages but the larger acceptance with the regulator's/government’s nod is a precursor for its acceptance as a payment and a storage unit of value.
Q) What are your views on metals that have so far seen a stellar run impacting commodity-linked stocks positively? Will the momentum continue or does it make sense to cut exposure?
A) Absolute stellar run. The disruptions in terms of Chinese output and demand coming back very strongly, lower inventory levels have pushed the prices of ferrous players more significantly though non-ferrous players are catching up very smartly.
Iron ore prices have globe above the $200 mark, Copper prices are zooming off for supply concerns on Chile the largest producer being able to suffice the 5mn tn requirement along with end-user demand remaining robust, HRC/CRC steel prices have risen sharply reflecting strong demand globally, aluminum prices stabilizing for diverse demand form a variety of end-user industries.
So, the momentum for metals both ferrous and nonferrous has remained extremely strong and would continue in the foreseeable future. However, the sheer expansive run-up witnessed in these counters seems to have most of the positives accounted for.
As per our O'Neil Methodology, a majority of these counters are extended from its 200DMA which is an indicator of some shake-out happening on some of these counters. So, it would make sense to cut exposure though momentum can take them further from the current levels.
Q) Do you think specialty chemical businesses continue to attract premium valuations?
A) Specialty chemicals have a lot of components attached to it, what product is the firm making, end-user demand, competition, export opportunities, leverage on the balance sheet, is the entry by other players difficulty making it a s niche offering, leadership position, pricing power etc.
We have a plethora of opportunities with a lot of economies looking beyond China for sourcing their requirements and China also clamping down for environmental reasons.
The companies in the Indian context operating in these spaces have a lot of factors working in its favour and are well-positioned to gain market share locally and globally for the sheer potential that certain applications have in terms of the market size and expand their revenue pie.
Some of our leaders across various verticals in this space have top-class management, Niche products, and well-managed balance sheets, top-class capacities, pricing power, and leadership at a global scale which is some of the facets we also like from an O Neil perspective as well.
Specialty Chemicals as space looks poised for superior earnings delivery based on all these factors over the next few years.
Q) Your 3-5 key learnings from COVID second wave?
A) The second wave has caused massive personal devastation and loss of near and dear ones and this cannot be replaced by anything in the world.
We need to be strong, assist the needy in whatever manner around us, and follow rules/regulations set up by the authorities and come together to defeat this beast. WE SHALL OVERCOME AND WE SHALL WIN.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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