Considering where we are today in terms of the NPA cycle and the kind of provisioning coverage ratio most of the lenders have, we will witness decent double-digit growth in profits in FY20
Now interest rate has fallen again and liquidity woes have seen minor easing but we remain selective in this space owing to capital constraints that many of the NBFCs are facing. Retail-focused NBFCs with solid parentage and strong capital adequacy are attractive, said Shailendra Kumar, Chief Investment Officer, Narnolia Financial Advisors in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.
Q: As NBFCs are facing liquidity constraints and putting pressure on economic growth, do you think the worst is ending soon for NBFCs?
A: Every economic and market cycle creates excesses and when the cycle reverses, investors face extreme events risk. During 2013-17, we saw continued optimism from NBFC pack, loan growth was strong on account of space vacated by public sector banks and at the same time falling bond yields gave NBFCs opportunity to shift their funding away from high-cost bank borrowings to low-cost market borrowings.
This virtuous cycle of rising loan growth and rising spread made NBFC stocks a preferred bet. But the cycle also created asset-liability mismatch as market borrowings were of shorter tenure while lending done by NBFCs were of higher duration.
And once interest rate started rising from the middle of 2017 that virtuous cycle ended, the ensuing down cycle has got further exaggerated by issues with infra financing books and also the liquidity tightness from the middle of 2018.
Now interest rate has fallen again and liquidity woes have seen minor easing but we remain selective in this space owing to capital constraints that many of the NBFCs are facing. Retail-focused NBFCs with solid parentage and strong capital adequacy are attractive.
Q: Currently, the slowdown in the consumer segment is clearly visible. Do you think the government will take strong measures to revive consumption growth?
A: The sharp slowdown in the economy requires strong fiscal measures along with the accommodative monetary policy. The forthcoming Union Budget along with simplifying tax provisions should give strong investment push and show a roadmap for factor reforms whether land or labour.
Once the investment momentum comes back in the economy, it would create buoyancy in the industrial activities that, in turn, will create prosperous India and higher consumption. Direct measure to boost consumption would be inflationary.
Q: Do you think Nifty is losing steam and breaking 11,000 in near future?
A: The stock market currently is in a highly indecisive mode. Even a stupendous election outcome could not trigger a new trend in the market. Market structure is surely deteriorating at the moment but this could be short-lived if we get strong fiscal initiatives to reinvigorate investment momentum in the economy and in that sense the forthcoming Budget is very important.
The Budget would influence the trajectory of Nifty for the remaining part of the calendar year. Right now, the market is trading at a one year forward PE multiple of 19.5 times and for the last 3-4 years, Nifty has oscillated in the range of 18-22.5 times one year forward earnings.
Q: Do you still subscribe to the opinion that this year will of small and midcaps despite all headwinds?
A: The last one year of underperformance of mid and smallcap stocks has brought their valuation in line with those of the largecaps. What is favouring largecaps right now is basically the nature of the fund flows into the market. Large domestic inflows that we are receiving today from MF SIPs, NPS and insurance are mostly towards largecap stocks.
Going forward, easing of system liquidity and falling interest rate will help generate buying interest in mid and small-cap stocks. But due to narrowing valuation differential, the stock performance that was a function of cap categories in the last few years, going forward would be cap agonistic.
Q: Most experts feel infrastructure will get a big boost during Modi's second term and will be the next good sector to invest after banks. What is your reading?
A: My own take is that banks would continue to lead the market rallies in the near future. Infrastructure should join the party, particularly as valuation favours the stocks in this sector. Infra companies that are part of the value chain in oil & gas capex, railways, and water should get strong order book boost going forward.
Q: Given ECB stimulus and likely US rate cut, do you expect more FII inflow in emerging markets including India in coming quarters?
A: US rate cut and ECB stimulus are surely positive for emerging market equities. In fact, FII outflows from markets like India in CY2018 was more a function of rising interest rate in the US and less a function of unattractiveness of emerging markets. But going forward, if Indian economic growth improves we may see long-term India specific fund flows coming back.
Q: Considering debt defaults, new NCLT cases and consumption slowdown, do you still expect double-digit earnings growth in FY20?
A: Nifty earnings have grown by a mere 7 percent CAGR in the last seven years, though sales growth has been in decent double digits. A large part of this single digit growth in profit was due to NPA related provisioning issue that financial sectors companies were facing.
Considering where we are today in terms of the NPA cycle and the kind of provisioning coverage ratio most of the lenders have, we will witness decent double-digit growth in profits in FY20.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.