FY21 earnings growth could be a bigger worry: Prasun Gajri, HDFC Life
- The domestic-focussed sectors are likely to do well over a period of time in India.
- We are also neutral-ish to underweight on IT and healthcare.
- We are not taking a very big bet on any single sector at this point of time.
Markets have been fairly volatile of late and July has been a very lacklustre month. What is the outlook for the market for the rest of the fiscal year?
Given the current circumstances, a fiscal year is a bit too long to really take a call on. From a very short-term perspective of market gyrations, considering where we are, I do not see the volatility ending anytime soon. This has been our view for the last six months or so. The markets will be volatile in this phase given a slowing growth, a volatile global scenario and prior to that, election issues. Now, post the election, we have a much more pronounced slowdown than what anyone anticipated. There is an issue in terms of how the global macro scenario plays out. There are instances, like what has happened in Argentina. We have seen some geopolitical issues across the world like Hong Kong, etc. I do not see any of these issues going away anytime soon. The volatility is clearly here to stay. That is the name of the game.
Now what happens during the course of the year? We believe that the markets are frankly not going to give any great returns. At best we will get a low single digit return and that is where we are. But that will be accompanied with fairly high levels of volatility.
This is for the fiscal year?
I am not talking about the rest of the fiscal. Let us take a 12-month view. I have got a single-digit return from these levels and very high level of volatility, which will continue. As you said, what we saw yesterday and what we are seeing today is a very difficult market for anyone, who is really trading for the short term. It is a market, where the short term is going to be very difficult to predict.
What are your thoughts on the corporate earnings this season? Will we see a concrete recovery in earnings this fiscal year as people have hoped?
We will definitely see a revival in the earnings. I do not think that is a challenge. What is going to be difficult is an earnings recovery which is in line with what the market, or at least the sell side/buy side, anticipated initially. I do not think the level of recovery is going to come through. Market consensus was somewhere between a mid 20s earnings to come through for Nifty. I do not think we are seeing that. But having said that, it is very likely that we will get a mid-to-high teen earnings growth, which in the context of what we have been seeing over the last four-to-five years, is going to be very, very good.
But in the context of what was anticipated earlier, it is going to be a disappointment. It is a question of how you really want to interpret that kind of earnings growth. But earnings growth will definitely be better than what we have been seeing in the past.
So for the fiscal year you are seeing mid-to-high teens growth for Nifty?
When and how do you think the economy recovers from here?
That is a very difficult question to answer, purely because I have not really figured it out. Or rather, I have not seen any reports or anything which is really putting causes to what has really led to this slowdown in the first place. We all have our conjectures. We all have a myriad of various factors which could have led to this slowdown. But I do not think there is any conclusive evidence as to what exactly is responsible. Most of the corporates are very surprised by the level of consumption slowdown and the economic slowdown which has come through. And this is across the board, across categories.
It is not just a single category like autos where suddenly we are starting to see a lot of slowdown. It has just happened quite suddenly and therefore people do not really have a clue as to what is the big reason. One must really fathom what that reason is. It is going to be extremely difficult to put a finger and say "okay fine, because this was a factor, this is now changing and therefore the economy is likely to recover at this point of time because the cause is getting eliminated".
Having said that, we should start seeing some sort of recovery. I am not saying it is going to be a full-fledged recovery over the next two-to-three months, especially on the consumption side. One issue which is very clear is the lack of government spending, both prior to the election and even till date. In the first quarter of the current fiscal, government spending has been very slow and even till July. Now, we hopefully will see that picking up over the next two-to-three months.
On top of that, given the flood situation, etc, in the country, I do anticipate a lot of government spending coming through. Once that happens, the system and all the earlier payments which the government has, start getting released into the system. I do sense a little bit of a pickup coming through on account of that.
Secondly, we will be getting into the festive season next. Since there has been a very lacklustre demand scenario so far, hopefully there will be some pickup in the festive season. Third, after early apprehensions, monsoon is starting to normalise, as far as the total rainfall is concerned. There are still question marks over spatial and time distribution though.
So, some sowing has picked up, reservoir conditions have improved. Hopefully, all these put together and you will start seeing some sort of pickup. But I remain doubtful whether that pickup is going to be substantial enough to get us back on to the groove.
Things will have to change substantially beyond that. We require some sort of stimulus. Now whether that stimulus is the consumption or a fiscal stimulus or a package for a particular sector, is not known. My sense is the help will be temporary. We need the investment cycle to recover. Only then will we see a large scale and permanent improvement in the economy because the corporate capex cycle is well and truly broken and the government capex is also stalled.
Under this scenario obviously, while the job data is not really available in India to the extent we want, a challenge could start emerging on that count as well. We have started to see some job losses in the auto industry. Putting all that together, unless we start seeing the investment cycle getting revived and that leading to the next multiplier effect, the economy will continue to muddle along. We will get some stimulus from various things and that will help tide over a few months. Then again, it will require some sort of support. That is one point.
Second is the improvement in the real estate sector will help the economy. Once the housing sector picks up, that will help a lot of things. Hopefully, at some point of time, given the fact that the affordability in housing has improved, the cost of loans has come down, so at some point of time we might start seeing a pickup of that. If that happens, it will help. But again, to put a timing on to this sitting here today is an extremely difficult task.
If economy is not going to recover any time soon, what will drive the earnings? When will private capex pickup?
Earnings are being largely driven through the financial sector. The financial sector has been doing reasonably well. While certain concerns have again emerged on asset quality, a larger part of these issues are clearly behind us. So credit costs have started to come down for the larger entities in the system. The larger part of the earnings recovery is being driven by the larger banks in the country. And I do not think that is going to change despite whatever is happening. We may see a little bit of a pullback, but the larger part of the earnings recovery is going to come from that.
At least for FY20, we will see some sort of recovery coming through. I am not so confident about the consumption pullback which will impact earnings across all categories -- be it discretionary or even staple consumption. To some extent, the financials will also be affected. Therefore, the earlier anticipated number of say 25-26% which the market was anticipating at one point of time is likely to be much lower, but it will still be a robust number.
On top of that, there will be one-off factors which we will see across some companies that will drive the Nifty earnings. The question is not the FY20 earnings, the question is what happens in FY21. That is still a little bit of a worry because unless we see some sort of revival in consumption and the slowdown ebbing off over the next three-to-six months, FY21 earnings could have a bigger question mark. I do not think anyone has really looked to project those earnings as meaningfully as one would like because they are still a little bit further away. Therefore that is a bigger worry. FY20 earnings growth is not such a big worry, as far as I am concerned.
When will we see the private capex pick up?
I guess it will have to be linked to a bigger pick up in the government capex. Private capex will pick up only once they see demand improving. In this scenario, when the demand is very lacklustre, I do not see why any private capex will really come through. In the meantime, we are starting to see some balance sheet improvement across the board. We are starting to see some corporates getting into a better shape. Until we get a scenario where the demand is looking rosy and robust, I do not see corporates being in a hurry to put up capex.
Could the NBFC crisis deepen further? What steps should have been taken to arrest the spread of this crisis?
Yes, there is always a probability of things getting worse, but I do not think that is the most likely scenario. It is possible, but not necessarily a probable scenario. The good part is that the authorities, government, banking system and RBI are fully cognisant of this. The first part is identifying and making sure that everyone understands the problem in a meaningful fashion. That has been taken care of now. So steps are getting taken. Announcement of the guarantees from the government side, also priority sector rules coming out from RBI lending to NBFCs, are steps in the right direction.
The panic in the bond market has to be arrested and those steps have to be taken by the authorities to ensure that at least the good quality NBFCs get the required amount of funding. One is not saying that you need to bail out some of the real bad quality ones. The good quality ones need to get funding at the right prices and that I think will help. Steps like these are only going to help in getting there.
For what the government could have done in hindsight, we can all think of 20 things. It is very difficult for me to say what should have been the steps taken at that juncture, so I would not really want to comment on that. Having said that, while situation may not worsen per se, the fear remains that the situation can continue as is for some more time. I think that is where the challenge is. Steps have to be taken to ensure that this situation does not last too long. If it lasts another six months, I think it only deepens the problem somewhere.
Do you think the government will rollback the surcharge on FPIs?
Frankly, I have no idea. If they had to do it, they could have done it by now. But again, it is their call. We have heard all sorts of statements.
We are seeing a lot of discussions. Everyone is being heard but there are no actions.
That is the prerogative of the government. I have no clue and neither have I been an interested party in a direct manner.
Do you think that overhang will keep bothering the market if it does not come true?
To my mind, it is an overhang, but it is not necessarily the biggest one in the market. The biggest overhang in the market is clearly the macro situation globally. Domestically, as well, it is the lack of earnings traction on the slowdown in the economy. If we were growing today and there was no slowdown in the economy, any tax of FPIs may not even have caused a flutter in the market. It may have led to a few 'if's and 'but's and may not have been a big issue on the table. Today it is a big issue primarily because we require succour and support from wherever it comes at this juncture. The fundamentals of the market are really getting threatened due to the slowdown and consumption spending. Things are not as rosy as they were supposed to be.
Which sectors are you overweight on and why?
We believe that, whatever said and done, the domestic-focussed sectors are likely to do well over a period of time in India. And the global situation anyway looks reasonably murky because the slowdown is only getting more pronounced. The trade war situation does not seem to be getting anywhere and people are now forecasting it to last until the US elections which is still a year away. We are more focussed on the domestic sectors.
Having said that, we continue to be positive on the financial sector despite whatever we have seen. We continue to favour the private sector banks, vis-à-vis PSU banks, and the banking sector, vis-à-vis the NBFCs, at this point of time. But overall, we remain positive on the financial sector. We are also positive on selective PSUs because we believe the valuations have become fairly cheap. But the supply overhang from the government is a big spoiler in that because despite the valuations being cheap, the stocks do not tend to do well as there is a lot of supply which is likely to come from the government.
But on a purely fundamental perspective, we do believe that is something we would want to look at provided we get a sense of when and how much supply will really keep hitting the markets in some of these names. We remain positive on some of the domestic construction space, be it a little bit of cement, some capital goods, because we believe that any recovery will be led by this sector only. Given the state of the markets, we are not taking a very big bet on any single sector at this point of time. So our overweights and underweights have been reduced from what they used to be because given the volatility in the market, you can never be sure what is really going to perform from a three-six month perspective. We are a little bit more aligned to the benchmarks at this point of time with a limited view on sectors.
Consumption was a major theme in Modi’s first regime? What do you think could be the theme under Modi’s second term?
I do not know which consumption was the theme in the first regime. I hope the theme is revival of capex. I mean, I am hoping for that whichever way it comes because that is the need of the hour. We need to get the capex cycle going. I mean, just cutting interest rates is just one part of it. That is coming through, but the next steps in terms of how to really get it going, something has to be done. So I hope the theme is largely capex revival in India.
Which sectors are you underweight on and why?
We have been wrong, but we have been underweight on consumption stocks for a while, especially the staples. But the sector has not really corrected, so that is one. We remain underweight on most global sectors like metals at this point of time. We are also neutral-ish to underweight on IT and healthcare given specific issues in both the sectors. We remain underweight on telecom. These are some of the sectors we continue to be underweight on. On PSUs, we are looking at selective ones. But overall if you look at the PSU basket, we will definitely be underweight. We are underweight on NBFCs, too.
How does the midcap and smallcap space look at this point?
Midcap and smallcaps have corrected meaningfully, there is no doubt about that. Having said that, whether we will really want to go overweight on some of the names at this point of time, remains to be seen. We would want to wait it out and not be in any hurry to get in there purely because it is an uncertain economic environment for one. The midcaps and smallcaps tend to suffer more because their balance sheets and the size and scale of business is not sufficient to tide over a bad scenario sometimes; especially if it prolongs for a long time.
Number two, the general investor behaviour is going to be to keep shunning some of these for similar reasons. And thirdly, just because the valuations have corrected, does not necessarily mean they are very attractive at this point of time. The valuations had overshot on the upside and we saw what happened. So it is very possible that the valuations can continue to underperform. At this point of time our preference remains large caps, but as you said rightly, with the valuations correcting we will continue to keep a watch on midcaps and smallcaps and see when we really want to increase our exposures. As of now, we are maintaining status quo and not really increasing exposures.
Do you think Nifty is a correct representative of the state of the market or is it too polarised?
The answer, obviously, is no. It is an unequivocal answer that Nifty is not necessarily representative. If you look at the midcap and smallcap indices, they have corrected far more. Even within Nifty, if you remove say 8 or 10 stocks, the rest of the Nifty is actually still pretty weak. So it is a very concentrated market which has really led to the rise.
But yes, from a pure market cap perspective, the larger stocks continue to do well and they are really giving a colour that markets have not corrected as much.