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Last Updated : May 19, 2020 12:32 PM IST | Source:

'Next two quarters will be challenging for BFSI space; retail inflows to be muted'

Investors would get ample opportunities to enter mid and smallcap space in the second phase of the next bull market and still make handsome returns.

Sunil Shankar Matkar

The next two quarters will be challenging for the entire BFSI space as it is difficult to predict when things will normalise and the segment is very sensitive and closely linked to economic activity, Rusmik Oza, Executive Vice President, Head of Fundamental Research, Kotak Securities, tells Moneycontrol's Sunil Shankar Matkar in an interview.

Edited excerpts:

Q: Finally, the much-awaited bigger stimulus package has been announced. Do you think these measures are enough to support the economy?


The Finance Minister has announced a plethora of liquidity-driven measures to protect MSMEs, NBFCs, farmers, small entrepreneurs and some pending reforms in sectors like agriculture. Taking into account all the measures taken by the government and the RBI till date, the total benefit and liquidity is around Rs 17.7 lakh crore (government around Rs 12.5 lakh crore and RBI around Rs 5.2 lakh crore). However, the near- term fiscal cost due to the measures announced will be only around Rs 1.4 lakh crore (0.7 percent of GDP).

Many of the measures are structural in nature and will take time to reflect in the economy. The stimulus will take the fiscal deficit/GDP to 7 percent or above due to the steep fall in revenues. Bigger states and export-oriented units that contribute materially to the country’s GDP are still under the red zone. If lockdown continues for an extended period in these red zones, then it could create labour issues and have an incremental impact on GDP.

Q: Do you think these measures will help the market get its mojo back soon?

Investors were looking for steps that could stimulate demand instantly and help revive GDP. However, the market movement suggests there is some kind of disappointment on this front.

To date, the government has announced a stimulus that accounts for around 9 percent of GDP and around 1 percent of the package is still pending.

With almost 90 percent of the stimulus already announced, there is very little chance of any major surprise coming from the remaining 10 percent. The recent behaviour of investors shows that it is a 'sell-on-rise' market and all rallies are getting sold in.

As earnings season is going on, we expect a sharper cut in future estimates and price targets. The near-term upside seems to be capped at 10,000 for the Nifty. Since the risk-reward ratio is not favourable at this point, it is difficult for the market to get its mojo back so soon.

Q: After liquidity boosters for NBFCs, MSMEs, MFIs, etc, do you think financial space is worth buying into along with banks?

The measures announced by the RBI and the government are very positive for the NBFC and MFI segment. Due to the lockdown, both supply and demand of credit is quite weak. The business of banks, NBFCs and MFIs has got heavily impacted by the lockdowns.

The next two quarters will be challenging for the entire BFSI space as it is difficult to predict when things will normalise. There is still risk- aversion towards smaller NBFCs and MFIs. NBFCs having strong parentage and MFIs having small banking licences will be in a better position to ride this difficult phase. The BFSI space is very sensitive and closely linked with economic activity. Hence, the impact on earnings and a rise in NPAs will be felt in FY21E. One should wait and look to enter BFSI stocks only on declines as downside risk still exists.

Q: Inflows into equity funds dropped significantly in April and there was a moderate decline in SIPs too. Do you expect any improvement from May?

Equity mutual funds reported net inflows of Rs 4,400 crore in April 2020 as compared to Rs 9,600 crore per month in the previous two months. SIP inflows declined marginally by 3 percent MoM to Rs 8,400 crore in April 2020.

Retail inflows will likely remain muted over the next few months due to uncertainty related to jobs and investors preferring to preserve cash. It will take time for investors to get back the confidence to start fresh investments. However, due to large QE programmes undertaken by central banks like the Fed and the ECB, we can expect FII flows to resume as and when economic activity resumes and goes closer to normalcy.

Q: Analysts say every crisis creates new themes and new stocks that can create huge wealth. Have you spotted any new themes for investment in the coronavirus crisis and why?

COVID-19 will bring in many changes in all spheres of life. Habits will undergo change and there will be a shift in demand patterns. Functioning through the cloud, online shopping, online streaming, change in eating habits, pre-emptive healthcare measures, emphasis on insurance, etc will gain prominence. New outsourcing opportunities could also come to Indian companies.

Few sectors that come to mind, which can create wealth in the coming years are specialty chemicals, CRAMs, insurance, healthcare, gas distribution, telecom and broadband services, online streaming and e-commerce platforms.

Q: Do you think the Rs 20-lakh-crore package will change earnings and economic growth estimates for FY21-FY22?

It is too early to build in the changes in earnings and GDP growth due to the recent stimulus measures. Between January 2020 and now we have seen our FY21GDP estimates come down from 5.5 percent to (-)2 percent and Nifty-50 EPS come down from around Rs 765 to around Rs 500.

In the last four months, FY21E of Nifty-50 has gone down by around 25 percent. Even though we are now building in around 30 percent earnings growth for Nifty-50 EPS in FY22E, the sheer cut in FY20E & FY21E numbers will pull down the absolute figure.

A revision in GDP and earnings will depend on how fast COVID-19 cases go down and demand revives. We also need to factor in the supply-side problem that could emerge due to the scarcity of labour.

Q: As midcap and smallcap indices trade in line with benchmarks, is it still a great opportunity to pick these stocks?

In terms of market cap orientation, our preference is purely towards mega or largecaps. Largecaps will have the benefit of stronger balance sheets and economies of scale. The impact on earnings will be higher for mid and small-cap companies.

Also, from a flow perspective, we expect FII flows could resume faster than the retail flows. As maximum flows of FIIs go into largecaps, they could be the first to have any meaningful revival. Investors will get ample opportunities to enter mid and smallcap space in the second phase of the next bull market and still make handsome returns.

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


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First Published on May 19, 2020 12:32 pm
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