The government is likely to take measures based on how the situation evolves rather than use all the bullets in one go.
Liquidity measures and the loan moratorium have bought financial institutions, particularly the lending franchises, some time as far as asset- quality issues are concerned but looking at the high-frequency indicators, the return to normalcy is still a fair way off and the asset quality pressures could eventually surface," Chockalingam Narayanan, Head – Equities, BNP Paribas Mutual Fund, says in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Finally, the much-awaited economic package has been announced. Are these measures enough to get growth back on track if new infections continue to rise and red-zones areas, including Mumbai, remain in a lockdown?
The measures announced are great from a structural perspective, with supply- side issues being addressed in a great manner. The sheer magnitude of the shift is quite noteworthy and can change the paradigm of the way the country can benefit from evolving trends like (a) shifting of global supply chains (b) opening up of the agri-sector distribution that could help farmers fetch a better realisation for their produce (c) inviting increased participation of private sector and foreign players in critical sectors like defence, mining, etc. At the same time, measures that have been announced have also been particularly targeted to support the most disadvantaged sections of society, ie the SMEs/MSMEs in the corporate sector, labour and farm sector among individuals.
The measures have also been taken in a manner where the fiscal position is not completely compromised and the monetary space is used more innovatively. This, in that sense, could well mean that the demand stimulus, which some sections of the market or economy were anticipating, did not come through. But that's the cognisant view that the government seems to have taken – that this is a marathon and not a sprint. In this context, one also gets the sense that the health solution is still not available and hence, the government is likely to take measures based on how the situation evolves rather than use all the bullets in one go.
Q: Do you think the market will get its mojo back with these measures?
Our sense is that the markets started correcting with the onset of the virus – first was a supply-side issue when it was constrained to China but became a demand problem when it spread across the world. With the health solution not found yet, the demand scenario is still evolving and there could be some continued volatility if there are further waves of this virus. To that effect, the efforts by our government and RBI (and similarly governments as well as central banks across the globe) are buying time to soften the blow on the economic front.
For markets to get their mojo back, we need the demand side to bottom out with a fair bit of improved visibility–implying, we find a solution on the health front. In the meantime, what can work for a country like India is possibly that we could gain some relative market share globally in a few businesses, like say, information technology, pharmaceuticals, chemicals, agriculture, auto and related value chains, etc. Such market shifts need to be monitored more carefully and acted upon, as they can prove to be sticky in the long run.
Q: Do you think the financial space is worth buying, along with banks, following the government and the RBI’s liquidity-boosting measure aimed at NBFCs, MSMEs, MFIs, etc?
The liquidity measures and moratoriums have definitely bought the financial institutions, particularly the lending franchises, some time as far as asset quality issues are concerned. However, looking at the high-frequency indicators, the return to normalcy is still a fair way off and in that sense, asset-quality pressures could eventually surface.
Given this backdrop, we believe that the financial institutions with weak liability side of the balance sheet are likely to find it difficult even now. Those with superior liability franchisees and higher capitalisation could actually gain a lot of market share, but even they will face some asset-quality pressure in the next few quarters. The non-lending financial institutions, where we have good exposure, are actually well placed from a business perspective, with some of them seeing this issue as a catalyst.
Q: Inflow into equity funds dropped significantly in April and there was a moderate decline in SIPs too. Do you expect any improvement from May?
Difficult to time the behaviour at a collective level. The monthly SIP numbers over the last few years have been steadily inching up and have not fallen off even in the current market fall, which is encouraging. One hopes this continues going forward as well.
Historically, we have seen during periods of economic stress that there is a marked shift towards increased savings across various sections of society. However, the slowdown could also mean there is the potential of job losses. This latter part is what one needs to be watchful of, as that can have an impact on the sustainability of the flow aspect for our domestic markets. If we manage to not lose too many jobs, then the propensity to save actually becomes a bit more at a collective level and that can be of help.
Q: Analysts say every crisis creates new themes and new stocks that can create huge wealth. Have you spotted any new themes in the COVID-19 crisis?
True. That's what we also notice when we look at the past. This time around, we have already seen that moving from financials space to other sectors. On areas or themes, rather than picking sectors, we focus on our BMV philosophy where we focus on (a) Business (b) Management and (c) Valuation. In the current context, because of the dislocation, cashflows and balance sheets of various businesses have seen a major change in a few sectors, reasonable change in a few sectors and very minimal change in a few. Some have also benefitted at the margin. In that context, the common theme that has emerged in this cutting across sectors, even where a sector is facing massive headwinds, is a few leaders benefitting disproportionately in terms of ability to gain market share in this phase of large dislocation. Market-share gains are typically more sticky and to that extent, our picks are benefitting more from this theme.
Q: After these measures, do you think earnings and economic growth estimates for FY21-FY22 will change significantly?
Our analysis and street estimates, both on bottom-up and top-down side, is suggesting that real GDP growth–by the sheer impact of the lockdown extended over four phases–is likely to result in the real GDP growth being negative 3 to 5 percent (Bloomberg estimates). Some of this cost could not be pushed forward given the moratorium and liquidity measures. Depending on this, and based on a gradual restart of the economic activity, we see a case for flat to negative single-digit fall in EPS at the largecap index level. For the mid and smallcap index levels, this can be more.
More than the accounting earnings, what we are following are the operating and free cash flows, which are more volatile. We are looking at what the stable state OCF and FCF can be for some of these businesses and what values those imply for the companies. Post that, wherever we see industry-leading franchises with good cashflows that filter through our BMV process, we own those businesses.
While we have been significantly focused on high-growth and quality business for last many years, with overall near-term growth likely to be impacted, we have added some exposure to low growth but strong cashflow generating quality companies as well which are attractively valued, whether it be in IT, auto, utilities or any other sector.
Q: Midcap and smallcap indices are trading in line with the benchmarks. Is it still a great opportunity to pick midcap and smallcaps or should one stay on the sidelines?
Rather than looking at companies in a straightjacketed fashion in terms of midcaps or smallcaps, we look at it more on basis of whether we own companies that are good and those that filter through our BMV filters. When we look at what filters through our process in the current situation, we do note that a greater proportion of them are today in the largecap space and accordingly, our preferences are skewed towards the largecap space (arrived through bottom-up stock selection). Having said that, there are some good industry-leading franchises with good cashflows, run by able management, with a long runway for growth at attractive franchise values even in the mid and smallcap space.
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