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Interview | We could possibly see earnings downgrades after Q1FY22 results: Rusmik Oza of Kotak Securities

Indian markets may not be out of the woods yet as we could be still 30-45 days away from seeing the peak of COVID cases.

April 30, 2021 / 11:12 AM IST

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities feels going by the second wave pattern of developed nations, the cases peaked in Europe in two months and in US in 3 months. India could also take 2-3 months for cases to peak, according to Oza.

Kotak Securities sees Q1FY22 and FY22 GDP at 29 percent and 10.5 percent, respectively. "We can expect these numbers to go down looking at the ongoing ground situation," Oza said in an interview to Moneycontrol's Sunil Shankar Matkar.

The Executive Vice President and Head of Fundamental Research at the brokerage firm said the last two quarters saw consistent earnings upgrades which would halt as of now. "And we could possibly see earnings downgrades after June quarter results, if the COVID situation drags into Q2," he said.

Edited Excerpt:-

Q Do you think the state-wise restrictions to reduce the spread of fast-rising COVID-19 will hit earnings growth for the June quarter? As a result, have you reduced your earnings growth estimates for FY22?


The ongoing escalation in number of confirmed and active COVID-19 cases across India could result in more lockdowns and restrictions in many more states and districts. The official figures and positivity rates across states suggest a very grim outlook for the next 2 months. June quarter will surely see impact on earnings on a sequential basis. However, on YoY basis earnings growth will still be material because we had a complete lockdown in Q1FY20 and we have a favourable base effect.

The last two quarters saw consistent earnings upgrades which will halt as of now and we could possibly see earnings downgrades after June quarter results, if the COVID situation drags into Q2. As of now we are not building in a complete lockdown scenario so to that extent we could see minor cut in future estimates, probably after June quarter results. We have not still not reduced our FY22 estimates but there is a risk of that happening after June quarter results.

Q What will be the impact of second wave of COVID-19 on the Indian economy in Q1FY22? Will it result in lower economic growth than expected earlier in FY22?

We have already started seeing rating agencies cut India's GDP forecasts for FY22 by 100-200 bps. Some of the high frequency indicators have started moderating and could reflect more in May and June. Going by the second wave pattern of developed nations we saw cases peak in Europe in two months and in US in 3 months.

India could also take 2-3 months for cases to peak. Since our second wave started in middle/third week of March we can expect cases in India to peak out by between May-end & middle of June. Our Q1-FY22 and FY22 GDP forecasts are 29 percent and 10.5 percent, respectively. We can expect these numbers to go down looking at the ongoing ground situation. For India, the pace of vaccination will be the deciding factor as to how fast the economy recovers from the second wave.

Q Is it a year (FY22) of consolidation for the market after a stellar 70 percent growth in benchmark indices? Is there any chance of double-digit returns for the year?

The Nifty50 is going through a consolidation phase whereby time correction could lead to moderation in valuations. From single-digit earnings growth expectation after the eruption of pandemic last year, we would end FY21 with around 18 percent earnings growth. This coupled with more than 20 percent CAGR earnings growth likely to come between FY21-23 will lead to moderation in valuations as we go forward. The Nifty50 forward PE has come off from peak of around 23x seen last year to around 21x as of now. Based on benchmark of 19-20x Fw PE and on March 2023, we can expect the Nifty to go anywhere between 15,500 and 16,000 by the end of FY22.

The one year Bloomberg consensus estimate of Nifty50 works to more than 16,500. On a realistic basis, Nifty50 can still give double-digit returns from current levels in the next one year. For making high double-digit returns, one will need to have a buy-on-dips strategy. Equities as an asset class still looks the most appealing because of the growth factor.

If in case there is a more selling pressure, what are those key sectors to buy and why?

Indian markets may not be out of the woods yet as we could be still 30-45 days away from seeing the peak of COVID cases. In any correction, we could prefer cyclical and economy-driven sectors over the defensives. The defensives had already outperformed massively in CY20 and because of the second wave we are seeing further out performance in sectors like IT and pharma. The defensives could peak out along with the COVID cases and thereafter we can expect the economy-driven sectors to gain momentum.

In any near term correction, the sectors that could see higher impact will be the ones that could throw maximum opportunities of making money. One can look to accumulate stocks from banking, retail, capital goods, select consumer discretionary, oil & gas, life insurance, metals and real estate.

Q Have you spotted any stocks that should be bought in the current correction. Kindly mention small rationale for the same?

We like the following stocks:

Escorts: Tractor industry is likely to growth in FY22 on the back of monsoon forecast. Construction equipment and railway business should also do well with revival in economy. We expect double-digit earnings growth in the next two years. The stock is trading at just 11x on FY23.

ICICI Bank: The lender saw solid recovery in loan growth at 14 percent yoy with healthy NIMs at 3.7 per cent in Q4FY21. The bank is likely to recover from the COVID episode faster than most players. Normalcy on return ratios for FY22-23 is now a high probability.

L&T: Government's impetus on infrastructure spending bodes well for L&T. This should lead to quick order realisation and eventual scale-up in execution. Volume boost with benign competition may yield pricing gains in future. We see meaningful gains for L&T in overseas markets beyond Middle East and in defence, we see scope for exports becoming a good opportunity. We expect EPS growth of 60.4 percent and 23.5 percent in FY22E and FY23E, respectively. L&T trades at 13x on FY23E which is way below its long-term average.

ICICI Prudential Life: Recent initiatives on product & channel diversification will drive growth in FY22E. We have raised our Value of New Business (VNB) and Embedded Value (EV) estimates by 15-19 percent and 8 percent, respectively. The stock trades at significant discount to peers & at 2x Price to EV on FY23.

Infosys: It has guided for 12-14 percent revenue growth and operating margin of 22-24 percent for FY22E. We forecast 16.4 percent revenue growth in FY22, 2.4 percent higher than the higher end of the guidance band. Expect earnings to grow by 15 percent in FY22E and 16.2 percent in FY23E. Overall, we expect Infosys to be in the leadership quartile of growth in the medium term. We value the stock at 25x PE for higher of 27 percent.

Q The market, so far, has not seen any major impact of record infections and in fact getting buying support on every major fall. What are those key supporting factors? Also what are major reasons for FII selling in the month of April?

Investors are seeing the second wave as a short-term phenomenon and going by last years' experience not many investors are tempted to sell. In fact, the recent correction has helped flows come back into mutual funds and DIIs have also turned aggressive buyers in March and April month to date. Fresh restrictions and partial lockdowns could impact the informal and SME segment more than the organised and formal segment. Larger companies have learnt to adjust to the new restrictions and work from home model.

The formal economy could register higher growth than the overall economy which is positive for listed stocks. As and when the second wave subsides, India could also witness strong pent-up demand leading to strong medium to long term growth outlook. The earnings growth trajectory could also remain strong because of the low base of first half of FY21.

The sharp rise in number of new COVID cases registered in India is a cause of concern for foreign investors. Also, the rupee after depreciating against the US is sustaining at around 75 levels which is a negative for FPI flows. The fear of rising cases has led to FPI selling in most of the emerging markets last week.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Sunil Shankar Matkar
first published: Apr 30, 2021 11:12 am
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