Stimulus package not impressive, but market unlikely to retest March lows: BNP Paribas

We expect the market to be range-bound in the near term with some downside risk. Having said that, we think the worst is behind us and we do not see the market testing the March 2020-lows, Amit Shah - Head of India Equity Research - BNP Paribas, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

A) It is a good headline number, but in order, to kick-start, the economy more will be needed. Including the recent stimulus package, which was largely focused on the long over-due relief to the MSMEs, the total stimulus is now at Rs 14 trillion and balance should be announced in the coming days.

The government has used both fiscal and monetary measures to address liquidity and asset quality concerns.  However, the government is not really spending a lot out of its pocket as largely all of the MSME relief in terms of loan guarantees, which will not be due at least for the next 12 – 18 months in terms of the first tranche of payment.

Even in the case of tax refunds or allowing drawing down on PF will not tantamount to new money coming into the system.

When we see the current stimulus of Rs 13 to 14 trillion, which is already announced, it doesn’t seem enough to kick start the economy as the fiscal component is very limited. Hence the timelines of the impact from the package become unpredictable.

We also need to acknowledge that the economy is facing a lot of headwinds and the government has limited elbow room as the economy was already weak and the government has already missed its fiscal deficit target.

The deficit is likely to expand further, which can stoke inflationary pressures and potentially hurt private investment in the long term.

As mentioned above, the stimulus package is a fillip to bring the economy back on track but it has to be backed by concrete measures for a meaningful impact.

A) So far, the majority of the measures from the government and the Reserve Bank of India (RBI) have primarily catered to increasing the liquidity.

Market participants are expecting the RBI to announce measures to limit the asset quality stress on banks’ balance sheets.

In addition, as a part of the stimulus, we believe that if the RBI extends the moratorium period and a one-time restructuring of loans that would be seen as a positive as it will cushion the asset quality impact on the banking system as a whole.

A) The stimulus released until now does not materially change our view on the market, even though it does help certain sectors more.

We continue to remain bullish on the large private sector banks as the MSMEs guarantees will, in turn, result in stronger balance sheets for the private banks.

Some of the large consumer staples companies can also benefit as non-discretionary consumption will get some boost from the stimulus in some form.

IT can also be a beneficiary as the stimulus package and increase in borrowing to fund the stimulus can result in a weakening of the Indian currency, which will bode well for the sector.

We expect the rest of the stimulus to be a mix of RBI measures and also some benefit for the infrastructure space. However, it is early to take a call on the same.

As things stand, autos, aviation, and hospitality are still grappling with weak demand despite a slew of announcements. The auto sector has been witnessing low demand and it will be impacted further, at least for the near future, in our view.

A) While we still have around 1/3rd of the stimulus yet to be announced, it looks unlikely we are in for material recovery in the markets.

We continue to expect the Nifty to range-bound in the 8000-9900 band based on our analysis of potential earnings cuts for FY21 and FY22.

Earnings continue to remain under pressure and our analysts have cut earnings estimates; Autos by 23-108% (ex-TTMT); Financials by 9-70%; IT Services by 8-20%; Consumer Staples by about 4-5%; and Energy by 10-30% for FY21 and an average 10% cut for FY22.

We observe, however, the street has been behind the curve in terms of earnings cut, and that can further weigh on the market in the near term.

There seem to be more negative headwinds including the spread of COVID-19 in India, lack of clarity with regard to the lockdown and the pace at which the economy opens up, return of workers especially the migrant workers and if that has an impact on the manufacturing and industrial sectors to ramp up post lockdown.

In addition, a potential second wave of COVID-19 cases, globally can once again result in the re-imposition of lockdown and delay global recovery, further.

To summarize, we expect the market to be range-bound in the near term with some downside risk. Having said that, we think the worst is behind us and we do not see the market testing the March 2020 lows.

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