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'FY21 earnings could be muted but normalcy seen in FY22, prefer B2C space'

India could still be amongst the fastest growing Large economies over next decade providing an attractive avenue for global Long term investors at a time when global growth has been very low.

April 07, 2020 / 01:35 PM IST

Recovery is likely to be seen more from the September quarter, provided we see that the brunt of this COVID-19 is behind us within next 2-3 months. Some of the delayed demand could actually come through from the December quarter, Karthikraj Lakshmanan, Senior Fund Manager at BNP Paribas Mutual Fund said in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpt:

Q: Crude oil has fallen more than 60 percent from its January 2020 high which should ideally be good for India. But do you feel it is favourable in current scenario?

If we look at Crude prices alone, the fall is a very big positive for Indian economy since we import most of our requirements. Hence it is likely to help in a reduction in our import bill significantly leading to a reduction in current account deficit which anyways has been trending down.

The savings can be used by the government to bridge the revenue gap, stimulus for the economy, etc. however, we need to bear in mind that lower crude oil prices are also a reflection of lower global demand and hence lower global growth. This could be negative for export-related industries and will lead to lower repatriation from oil-dependent economies.


Q: Is it the right time for fundamentally strong and cash-rich companies to acquire small/midcap (even big) quality companies?

Yes. Fundamentally strong companies are always on the look-out for good M&A opportunities. The current challenging environment may lead to some attractive deals for these companies which earlier may not have gone through because of higher valuations.

However, we always have preferred companies that have gone for proper capital allocation and focused on deals that are synergistic to existing business and value accretive in the medium to long term. We would avoid companies that go for M&A just for valuation arbitrage or to increase balance sheet size without many benefits.

Q: Value seems to be everywhere due to steep fall across sectors/stocks but what are your favourite sectors?

We at BNP have been following an Investment Philosophy of BMV framework (Business-Management-Valuation) in which focus has been to identify companies with sustainable long term earnings growth. We look out for companies growing faster than industry and industries growing faster than the economy.

So inherently, the inclination has been towards leaders or market share gainers within sectors /sub-sectors which are growing faster and generating healthy cashflows. In the current market correction, some of the structural Long term growth companies, too, have moved from expensive multiples to reasonable or attractive valuations. Our preference is for such companies.

They are mostly in the B2C space that is Business to Consumer space within which we prefer Private Retail Financials, Consumer Staples, Durables, Retail, Cement, Paint, Telecom and Media. At the margin, we have a small allocation to companies with low growth but healthy Balance sheet, Cashflows and available at attractive dividend yields. We have avoided high debt companies, deep cyclicals, and global commodities.

Q: What could be the impact of COVID-19 on companies' earnings in Q4FY20 and Q1FY21?

Earnings impact is likely to be relatively minimal for the March quarter (Q4FY20) given that the disruption started only in the last 15 days of the quarter. However, as the brunt of the impact, looking at the nationwide lockdown period (14 of the 21-day period) and the experiences from other markets, the earnings are likely to be down in double digits for the broader market index in the June quarter (Q1FY21).

The recovery is likely to be seen more from the September quarter, provided we see that the brunt of this COVID-19 is behind us within the next 2-3 months. Some of the delayed demand could actually come through from the December quarter.

Hence, assessing the current situation, the expectation is the second half of FY21 could see a recovery while overall FY21 may be muted due to the first half negative impact. Having said that, the situation is very fluid and would be very difficult to make predictions. However, FY22 could be a normal year with normalized earnings growth.

Q: Report suggested that lockdown is expected to create a big problem for banking & financials sector in terms of NPAs. What are your thoughts?

If the situation is tackled within the next 1-2 months and economic activity returns close to normal levels by then, the impact could be manageable with the Moratorium provided by RBI last week. However, if thehas situation prevails longer, then some pockets of lending could have higher NPAs and credit costs.

Q: Gold and Oil and equities etc have been falling – what does it indicate or how should investors decode this?

The correction in equities across the globe has been so fast and so sharp that not many investors have had enough time to react. In a normal market correction or Risk-off trade, one could generalize and say money would move away from riskier assets like equities into fixed income and gold.

The read-through as of now is that the markets are worried about the COVID-19 situation, the spike up in new cases and the lack of solution to control the same in order to free the world from Lockdowns.

Q: What is your advice to your clients?

Ensure that the asset allocation mix of the investors is in sync with their risk profile. Within that, rebalance the equity proportion with the movement in the markets and better to consider continuing with SIPs after having borne the brunt of this unforeseen development of COVID-19 Pandemic. Fresh Equity allocation could either be staggered over next few months or consider waiting for clarity on the Pandemic.

Q: FIIs have sold more than $9 billion worth of shares since February 24. Are you really worried about the outflows?

Fundamentals play a bigger role in the Long term while in the near term flows could decide directions. FIIs, when one looks at the long term, have been large investors into Indian equities over last 2 decades. Coming to the flow aspect, the sharp outflow in last few days has had an impact on the markets and has been primarily driven by the passive money funds.

Thankfully, the Domestic Institutional Investors have become much bigger now compared to even say 5-years back. Especially Mutual Fund SIPs have been granular and have been steadily inching up even in the last 2 years when the majority of the market has been in the red.

When we have a solution for the Pandemic and economic activity comes back to normal, a Long term investor would appreciate that the valuations which were expensive and a concern even a month back has now turned very attractive.

Trailing Nifty 50 EPS is around 540 making trailing valuations attractive at below 16x PE which is close to the bottom quartile of the historical P/E distribution over the last 17 years data that we have. (Data source: Bloomberg for Nifty 50 trailing EPS) Also, India could still be amongst the fastest growing Large economies over next decade providing an attractive avenue for global Long term investors at a time when global growth has been very low.

Q: Do you feel the rate cut will solve COVID-19-led issues? What should the government and RBI do to tackle these problems now?

RBI MPC in an advanced meeting on Friday (March 27, 2020) took measures to further ease liquidity, cut Repo rate by 75 bps which was more than expected and provided moratorium of 3 months for financial institutions to ease the situation for the borrowers during the lockdown. This was a much required step in order to boost sentiments of the markets and could be instrumental along with Government measures in providing relief during the lockdown.

The real impact of the Pandemic on the economy would be ascertained only later but both RBI and Government have hinted at further measures to revive growth. There could be more room for rate cuts and Fiscal stimulus in terms of tax cut or directed Government spending could help.

Disclosure: The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The sector(s) mentioned herein do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s).

Disclaimer: advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Apr 7, 2020 01:24 pm
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