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Daily Voice | We are positive on chemicals, textiles, industrials and autos, says Satish Ramanathan of JM Financial

In Budget 2022 | 2021 highlighted the resilience and adaptability of Indian companies. They have come out stronger and more efficient, with debt levels declining.

December 29, 2021 / 08:02 AM IST

Satish Ramanathan, MD & CIO – Equity at JM Financial Asset Management believes that the companies in 2022 may embark on an acquisition spree as it will be the easiest way to grow into new products or categories. "This will help growth of both topline and bottomline.

On the RBI's action in 2022, he feels the central bank is expected to also maintain a pro-growth stance as the recovery is still not widespread and most of the growth is coming through government spending.

"There may be a pressure to increase rates to show some policy action to tackle inflation but we are of the view that it would be a token rate hike rather than something which will significantly change the earnings trajectory of companies," says Ramanathan who has about three decades of experience in the industry.

Do you think there could be more market correction in coming months given the Omicron worries, expected rate hikes and liquidity tightening? Also is there any possibility of double digit returns in 2022 in comparison with 2021 (up over 20 percent so far)?

Our base assumption is that market returns will be more measured than in the previous year, with a higher volatility. This higher volatility is on account of the recent Omicron spread and its impact on lives and economy, input costs impacting operating margins and growth being impacted due to pent up demand waning.

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While these remain the obvious headwinds, improvement in household and corporate balance sheets have been significant and this may lead to sustained growth for some time. While volume growth can come down, revenue growth may still be in double digits as inflationary pressures have prompted many companies to increase prices. Hence profit growth can still move up in double digits for some select businesses as also stock market returns.

The market has seen the first biggest correction since the beginning of bull-run last year. Have you spotted any themes that one has to consider for investing in the current free-fall, for 2022, and why?

You are right in calling this the first correction for CY 2021, but we would not call this a free fall. Corrections help in resetting expectations to realistic levels and we have seen one such. As for the broad themes and sectors, we are positive on chemicals, textiles, industrials and autos.

There is a significant unfulfilled demand in cars due to the semiconductor shortage and it is expected to surprise us on the upside. We also expect infrastructure spending by the government to continue which will help recovery in industrials. We see some nascent growth in industrials and exports in light engineering also helping growth.

We see IT as a sector that can show sustained growth for the next few years as COVID has encouraged many companies to adopt a flexible work approach migrating to Cloud faster than ever before. Similarly, some of the new concepts such as Quick service restaurant (QSR) and Fintech companies have also been beneficiaries of this disruption.

2021 was the record year for primary market in terms of number of issues, amount of fund raising, multi-baggers etc. Do you expect similar kind of records in the primary market in 2022 as well?

The IPO market has remained muted for several years at a stretch and is now reviving. Apart from IPOs, we are also seeing companies going in for expansion and deleveraging through rights and QIPs. It is expected that this process will continue as the IPO pipeline is healthy.

There have been many unicorns which have been created and these companies will come into the market. While valuations need to be checked, we remain optimistic about IPOs as these bring in new businesses and avenues for growth. The sheer volume of these IPOs may cool off markets but it is expected to have a positive trend.

How do you sum up the year 2021 in terms of events that supported/dragged the Indian equities? And what are the major events to watch out for in the coming year 2022?

2021 highlighted the resilience and adaptability of Indian companies. They have come out stronger and more efficient, with debt levels declining. We saw companies generating a record amount of cash flows and paring debt. It is expected that the trend may continue. In 2022, it is expected that the companies may embark on an acquisition spree as this will be the easiest way to grow into new products or categories. This will help growth of both top line and bottom line. Apart from this, it is expected that investments may commence as companies try to capture the value chain more comprehensively. So the theme of large companies acquiring for growth and smaller companies investing for growth will be the two key themes to watch.

Do you think it would be a big bang budget and what would be focus areas? Also is there any populist measures given the states elections going ahead?

The Union Government has done a creditable job in containing the fiscal deficit but this has come at a cost. Fuel prices increased creating a ripple impact on inflation. While there are attempts to reduce taxes on fuel, we are of the view that it will not reduce the inflationary pressure.

From the past few budgets, it seems that this government is more keen on improving corporate health and aim for fiscal consolidation. Under these circumstances, any significant concessions to the public in form of taxation is not expected. Corporate tax rates have already been adjusted and hence any further reduction there is not expected.

There may be concessions aimed at a few specific industries to induce investments and growth as also job creation, but that apart we may not see much reform. A bold action to stimulate the economy would be to reduce GST rates and personal income taxes to increase consumption and stimulate the economy but we are of the view that this would not take place.

Will India continue to enjoy premium to most of emerging markets in 2022 and why?

There is a strong case for India to trade at a premium to other emerging markets and its primary reason lies in its demographics - where number of people getting into the workable age will create markets for housing and other allied industries as also demand for consumption and savings products. Consequently, growth may continue to remain higher than other well penetrated emerging markets, and hence a premium is justifiable.

Given the rising expectations for three rate hikes in the US in 2022 and liquidity tightening to control inflation, do you expect the RBI to think of rate hike in second half of 2022 or will the RBI continue to prioritise growth?

All Central Bankers are worried about the sustainability of growth as also the inflationary pressures. Inflationary pressures will continue to be an area of concern as supply side issues may continue to impact availability of key goods. China's strict COVID protocol is further impacting shipping times and hence rates as well. This is leading to a unique situation of pent up demand in many areas. There are many products where China is the sole supplier.

Demand is not likely to come down with small rate hikes or liquidity reduced. Our base assumption therefore is that inflation may be a recurring theme for a longer period of time than what the market expects. However, it is expected that Central Bankers will be slightly defensive in their policy action and pro-growth.

RBI is expected to also maintain a pro-growth stance as our recovery is still not wide spread and most of the growth is coming through government spending. There may be a pressure to increase rates to show some policy action to tackle inflation but we are of the view that it would be a token rate hike rather than something which will significantly change the earnings trajectory of companies. Market volatility will however increase as inflationary pressure remains and central bank actions are watched.

Disclaimer: The views and investment tips expressed by investment 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.
Sunil Shankar Matkar
first published: Dec 29, 2021 08:02 am
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