Our Nifty earnings estimates have been revised downwards by around 18 percent in FY21E (bake in 5.9 percent earnings growth now) with major downgrades being from commodity pack (Oil & Gas, Metals) and Auto.
We do foresee FY21 as the washout year for corporates as the steep impact in terms of complete revenues/production loss will be amplified by fixed costs during this period, impacting earning," Pankaj Pandey, Head of Research at ICICI Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: The market witnessed rally last week on hope that the daily count of new infections and deaths in Europe and New York could be declining, but the situation seems to be different in India. Do you think such rallies are sustainable given grave concerns over economy and earnings? What is the road ahead for market in rest of 2020 and also in FY21?
The global market recovery has been driven by the fact that investors now have begun to focus on recovery. News flows such as announcement of economic stabilisation packages by key countries and stabilisation/fall in the number of new cases in Europe which may implying flattening of curve there have been key catalyst of overall global equity market recovery.
Furthermore, at the India level, indication of phased exit also provides some visibility of resumption in certain pockets of the economy. Sustainability of the rally, however, would hinges on follow-up in number of new Covid-19 cases in India (stable trajectory so far) as well as globally which would eventually determine the timing of economic activity resumption.
We do foresee FY21 as the washout year for corporates as the steep impact in terms of complete revenues/production loss will be amplified by fixed costs during these period, impacting earning. However, given the already benign base and further decline in earnings during the current phase, the earnings recovery in FY22 would be sharp. To encapsulate, market recovery could be 'V' shaped, economic recovery may be 'U' shaped.
Q: What are those three things investors should avoid now, and three steps he/she should follow in such kind of market conditions, why?
We continue to advise our customer to avoid a) leveraged Businesses, b) ones with fortunes directly linked with commodity and c) lower end of value chain. We expect the revenues loss to have steeper impact on levered companies. Similarly, the lower end of value chain would tend to suffer from payment stoppages/delays from clients, thereby further aggravating their financials. In terms of sectors, we would avoid Metals, Oil & Gas and Real Estate.
We continue to advise bottom-up stock picking and our three areas of focus are
• Established business models that have survived such panic situations many a time with a credible management at the helm.• The companies have a steady balance sheet with no leverage and a credible history of generating positive cash flows across business cycles. The RoCE of such companies (>15 percent) is sufficient to cover their cost of capital and create incremental economic value added or EVA
• The companies are consistent dividend distributors. The dividends earned in rough times like these, to some extent, will help to cover the opportunity cost of holding such stocks.
Q: Every experts feel bottom–up valuations turn attractive, but do you think the sentiment indicators have yet to signal a final bottom? Also do you think the selling intensity and price momentum have signalled a bottom?
The key indicator to track would be new cases addition, and VIX levels. Fortunately, both have shown some moderation indicating some respite. The straightforward answer to what is or was bottom (in case we have already hit it), however, is not known to any one, in our view and only ex-post analysis of such thing is done in our markets.
However, at the same time, history being a good judge, tells us that financial markets do discount distressed events at a very rapid pace, sometimes overshooting on the downside. Even on a historical basis, we believe broader markets have coincided with long term averages currently which has started throwing up opportunities in the large cap/midcap space. Focus on bottom-up stock picking, therefore, is more relevant than ever rather than calling out market bottom.
Q: Do you really think corporate earnings and economy will be hit hard in FY21?
Our Nifty earnings estimates have been revised downwards by around 18 percent in FY21E (bake in 5.9 percent earnings growth now) with major downgrades being from commodity pack (Oil & Gas, Metals) and Auto. Therefore, in that sense, we do expect corporate earnings to be washout for FY21.
Primarily, the complete closure in business activity viz. production and sales and distribution across industry do imply that benefits of lower crude will be only be visible on full economic resumption i.e. in FY22 earnings.
Q: Where do you see the leadership coming from in the next rally whenever it will begin, and why?
If, we notice earlier the defensive pack preference was in the order of FMCG, IT and then pharma. Here we do witness Pharma taking a prominent weighing, going ahead, after the pandemic situation where health will be now in focus globally. Similarly, IT pack could take a breather, before the extent of damages across businesses could be determined. Any big destruction in major client segment could result in huge earnings risk for the IT players.
Similarly, the theme of insurance will take precedence as people would start focussing on risk coverage both on health and any other activity/assets amid the uncertain scenario.
Q: Do you think the coronavirus-led crisis will help India to focus on several opportunities that will reduce dependency on global counterparts? Do you think the $5-trillion target is achievable by 2024 now?
Coronavirus led crisis, at the global level, is likely to present a more inward-looking focus by economies as they would now seek to lower their dependencies on others. The trade relationships could also brace up for shocks in terms of duties and embargos ahead. It could, in our view, herald a new economic revolution with newer territories emerging as key manufacturing/services place.
Amid this and rising outcry on overall dependence of major economies on China, India is bound to emerge as an alternative production destination. The factor, being, the addressable market of India of around 130 crore is itself a key trigger for India emerging as production growth destination.
Q: With this COVID-19 crisis, do you think companies from ESG space could get more attention?
Globally, ESG has gained prominence as investors have started to focus on “sustainable environment” as key theme of investing. Ironically, with this COVID-19 crisis, business will have to redraw their “business continuity plan” to get themselves resilient to external shocks. Within the same, ESG is likely to feature as on key component. Therefore, ESG is likely to get more attention. However, we would stop short of crystal gazing and calling it “the real winners”.
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