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'Pace of economic slowdown has fallen but recovery still not visible'

A serious recovery in the auto sector will be around the festival season, during the third quarter of the next financial year FY21, says Shailendra Kumar of Narnolia Financial Advisors.

February 26, 2020 / 01:02 PM IST

Some of the measures taken by the government and RBI will take time to get reflected in the economic growth. Though the pace of slowdown has come down, the recovery still is not visible, Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors, tells Moneycontrol's Sunil Shankar Matkar in an interview.

Q: Most experts say that earnings have not seen major growth in the last six years and the December quarter was also in line given the current economic slowdown. Also, FY20 is unlikely to be strong. Do you see a 15-20 percent earnings growth in FY21?

A: What has happened over the last six years is that while sales and EBITDA level growth has been decent, it is the net profit-level growth that has continuously disappointed. That is why for valuation multiples based on sales or EBITDA, our market is trading close to long- term averages but for valuation multiples based on net profit, it looks stretched.

Corporate profit as a percentage of GDP is at a decade- low. If we look closely, it has happened as a series of one-offs in terms of balance-sheet impairment have hit Indian corporates in recent years. We believe as these one-offs recede, earnings growth for FY21 would be decent 15 percent plus.

Q: PSU banks are still facing some non-performing asset pressure, though there was some NPA resolution, private banks have been outperforming PSUs. What are your thoughts?

A: Private sector banks have outperformed public sector banks for a long time now. PSU banks facing severe NPA problems are partly the reason for this. The outperformance of private banks is more due to the fact that private banks are continuously taking market share both in terms of deposits and advances away from PSU banks. Also, the recent market-share gains by private banks are accelerated as growth in corporate credit is very slow while retail credit where private banks are better positioned remains robust.

One should expect better performance by PSU banks only once corporate credit improves. In terms of NPAs, though FY20 aggregate NPA is higher than FY19, it is still below the peak GNPA of FY18. More importantly, most of the banks have adequate provisioning levels now.

Q: The pharma sector has been gaining traction, there has been buying in quality largecaps and midcaps. Will the sector outperform during the year and do you feel USFDA concerns have started easing?

The risk-reward ratio for investing in pharma stocks are turning favourable after a long time. For most of the pharma companies, the decline in EBITDA margin has stabilised and deterioration in working capital has also ended. In fact for selective names, things are on the path to improvement. The pharma companies that have robust domestic business surely appear set for outperformance this year.

Q: The much-awaited SBI Cards IPO will hit the capital market in the first week of March. Will it revive IPO market sentiment?

A: Credit cards are still an under-penetrated category in India and are growing at a rate of 25 percent year-on-year. The novelty of the sector and the size will also attract lots of attention to this IPO.

Q: The latest data suggests that the coronavirus fear seems to be spreading to other parts of the world. What are the major challenges that can dampen investors’ mood in the year ahead?

A: The problem right now is that the US market that had been the major driver of global risk capital in the last few years is showing signs of weakness and this can trigger some risk adjustment in the financial market across the globe. Domestically, though the pace of slowdown has come down, the recovery still is not visible. Some of the measures taken by the government and RBI will take time to get reflected in the economic growth and in the interim, we remain dependent on global risk sentiments.

Q: The auto sector continued to show weakness on a yearly basis but sequentially the performance was better in the third quarter and even the operating performance gained traction due to lower commodity prices. Do you think the worst is over?

A: The auto sector will take more time before a robust recovery starts. Though system-level inventory has corrected to normal levels, dealer-level working capital financing remains a concern. Uncertainty surrounding the supply of BS-VI components due to the recent China issues is also not helping the sentiment. We expect a serious recovery around the festival season, during the third quarter of the next financial year FY21.

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Sunil Shankar Matkar
first published: Feb 26, 2020 01:02 pm