As we move from recession to recovery, from virus to vaccine on the macro front, we think we'll move from a liquidity-fuelled rally in 2020 to more earnings driven movements in 2021, Trideep Bhattacharya, who's a Senior Portfolio Manager, Alternative Equities at Axis AMC said in The Market Podcast with Moneycontrol.
Q) Sensex climbed 52,000 by Nifty50 also hit 15,400 levels in February. So, what is the way ahead, and what is powering the rally?
A) Yeah, great question. We expect 2021 to actually be a transition year for the equity market. As we move from recession to recovery, from virus to vaccine on the macro front, we think we'll move from a liquidity-fuelled rally in 2020 to more earnings-driven movements in 2021.
Moreover, I would like to point out, there are three factors that make me feel that the enabling conditions for a new business cycle is in place.
First -- the real interest rates in India as well as across the globe is at a 10-year low. And, usually, over the last 100 years, that has been a good place to begin an economic cycle.
Second -- liquidity conditions continue to favor emerging markets overall. And we might see the flows continue.
And third -- I would say the impact of the stimulus, as we saw in the budget in India recently, and also in the United States will continue to have a positive rub-off on the economies over the next few years.
We expect 2021 to be the most stock-fuelled rally, and we continue to monitor these variables where they are intact or not. The macro conditions are actually quite robust and quite positive at the moment as we speak.
Q) It was a second consecutive quarter when earnings didn’t disappoint investors in fact it gave the confidence that ‘All is Well’ within India Inc. What are your big takeaways from the December quarter earnings season?
A) Third quarter reflected a revenue growth of about 9 percent amongst the BSE 100 firms. There are three big takeaways that I would like to point out.
First, we saw a broad-based recovery in revenue growth across sectors including discretionary, metals, telecom, cement, IT, healthcare, with only 22 firms actually reporting a decline in revenues amongst the top 100. This is just quite an achievement.
Second, in my opinion, corporate India's ability to cut costs, resulting in an improvement in EBIT margins they’re priced is positive. This resulted in an EBIT growth of about 18 percent last quarter, and about 40 percent of the firm's actually reported a 30 percent-plus EBIT growth -- so huge surprises on the positive side. While some of the cost will come back and we will see how much of these cost savings can be retained, the extent of cost savings was clearly positive.
Third -- Most importantly was the return of the earnings upgrade cycle in India. We have now seen an earnings upgrade of 6 percent for FY'22 and FY'23 earnings estimates since September 2020. This has been the first time in a while.
Q) A small data analysis on Nifty50 stocks highlighted that Nifty50 might be trading at record highs, but only a handful of stocks actually hit their respective record highs. Does it suggest that there is still plenty of upsides left in Nifty as specific stocks start to pick pace?
A) Good spot. I would say that while we have seen a broad-based recovery from the depths of the June quarter in 2020, recovery has been uneven across firms in the same sector and across sectors as well.
I would like to make two distinctions between the haves and the have-nots.
First, the industry leaders versus the rest. Within the same sector while industry leaders showed robust recovery, the mid-tier firms haven’t quite seen a similar extent of rebound.
Second, I would point out brands versus the unorganized sector. We noted that the brands have gained significant market share over the last year resulting in better growth rates as compared to that of the unorganized sector overall.
From a stock market point of view, we see a similar phenomenon getting reflected in the stock prices.
While we think that going forward a two-paced recovery will continue within the sector, i.e. leaders benefiting more than of others. And, as recovery reaches more sectors of the economy, there could be stock-picking opportunities beyond Nifty in my opinion going forward.
Q) How are you identifying winners for your PMS strategy amid a gush of liquidity from FIIs?
A) At Axis PMS, we have oriented our portfolio towards earnings normalization across the economy. And this has helped us identify winners ahead of time. Let me elaborate.
From March 2020, wherein a meaningful part of our portfolio was focused on stocks that cater to the essential demand, like staples, stocks – staples-related stocks, et cetera. We have increased our portfolio tilt towards stocks that cater to deferred demand.
For example, discretionary consumption and investment demand, wherein business was actually down to zero in the peak months of lockdown, and these sectors are gradually returning back to normalcy.
In doing so, we feel that we are positioning your portfolio just in sync with where the earnings upgrades are about to come. And as that happens, we have played the earnings recovery highlighted earlier quite efficiently so far and continued to do so going forward as well.
Q) Please suggest a checklist for investors to evaluate stocks as benchmark indices hit record highs?
A) While every investor has his own toolkit, I would like to point at two areas in particular, which in my opinion is particularly relevant in recent times.
First, I would say that while 2020 was focused on -- was all about focusing on the balance sheet, 2021 would be about understanding the P&L dynamic, the profit and loss account dynamic.
In other words, understanding of the operating leverage of the companies that one is analyzing is extremely critical. Companies with a huge positive operating leverage would see earnings upgrade come through and surprise investors going forward. That's number one.
Number two, with commodity prices increasing across the board, focusing on companies with pricing power of the business that we want to own would be the key for investor returns going forward.
While companies which have strong pricing power will be able to maintain profitability on the back of input costs rises, the ones with mediocre or no pricing power might actually see a squeeze in margin.
As you can see, both of these are bottom-up factors which are operating leverage and pricing power, we recommend a bottom-up style of stock picking strategy from hereon.Disclaimer
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