Enough liquidity globally; here’s what will decide how much funds come to Indian stock market | INTERVIEW

There is stress in the financials but the deep correction in their stock prices has made them attractive on Price/Book Value basis.

Stock markets have seen some recovery after foreign institutional investors deserted India in March. However, the inflows are still far from what those used to be. Whereas there is ample liquidity across the globe, it’s up to the emerging markets, such as India, to attract maximum from it. How much of those foreign funds do emerging markets manage to attract will depend upon the management of coronavirus pandemic and the economic recovery from it, said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities. In an interview with Kshitij Bhargava of Financial Express Online, the market expert talks about his view on the March quarter earnings and the shed light on how to look at financial stocks at this juncture. Here are the edited excerpts:

1) If we look at financials, the situation looks grim. S&P Global says recoveries for banks have been set back for years, should investors steer clear of the sector?

It may not be right to paint the entire financial sector with the same brush. Agreed there is stress in the financials but the deep correction in their stock prices has made them attractive on Price/Book Value basis. Within the financials the stress and pain could be higher in case of Micro Finance companies and diversified NBFCs as compared to banks. There are different versions of the moratorium impact on the BFSI space. It is ideal to wait-and-watch as the second leg should provide better insights into the stress. The number of customers under moratorium was highest for microfinance companies followed by NBFCs then PSU banks and lastly private sector banks. As the economy opens up the number of customers under moratorium is going down month-on-month basis. Larger NBFCs have prepared themselves for the challenging period by creating large provisions and increasing liquid investments in the balance sheet. Most BFSI companies are looking to raise capital to strengthen their balance sheets. Investors can look to buy good quality banks and larger NBFCs if there is any sharp correction in the market. 

2) Foreign funds have been taken away from Indian equity markets, what do you think needs to be done to bring foreign investors to Indian stocks?

Globally there is huge liquidity in the system because of the QE programs run by central banks of developed nations. How much of the liquidity comes to emerging market countries is a function of how countries handle the Covid-19 situation and economic recovery. In this calendar year we saw only one major outflow in the month of March when FIIs pulled out USD 8.4 bn out of Indian equities. From April till date FIIs have net invested USD ~4 bn in Indian equities. India is a long term favoured market for foreign investors. We just need to go back to our normal GDP growth rate and FIIs will once again come back to invest over here.

3) What are the biggest takeaways from the March quarter earnings of India Inc?

March quarter results were significantly below expectation. March was a tough quarter for corporate earnings due to Covid-related disruption to demand and supply both. Net profits of Nifty-50 declined by 41% which is 30% below our expectation. Net profit of most sectors declined sharply on-year basis. A few sectors like banks, healthcare services, pharmaceuticals and telecom delivered decent y-o-y growth in earnings. Many companies have not given guidance for FY21 because of the ongoing impact of Covid-19. Between Pre-Covid and now we have seen sharp cut in our future earnings estimates. For example we have seen a cut of 21% in our FY21 revenue estimates and 40% cut in our FY21 earnings estimate (between Pre-Covid and now). On similar lines our FY22 revenue and earnings estimates have gone down by 13% & 23%, respectively.

4) It’s been suggested that the government of India must spend more on infrastructure to get growth back on track. Do you believe so?

Due to contraction in the economy we would see lower taxation revenues, weaker fiscal position and surge in overall public debt-to-GDP. Also large sums of money is going for the welfare of the poor people which is the need of the hour. We expect India’s consolidated fiscal deficit to be in the range of 11-12% in FY21 versus the 6-7% range of the past few years. Most of the increase in the fiscal deficit would arise from lower tax revenues and not from any material increase in expenditure to support the economy. Ordering of projects could get delayed which in turn could put further pressure on growth. India’s public debt-to-GDP will likely be in the range of 82-83% by end-FY2021 from 70% at end-FY2020. This may restrict any large expenditure from the government side.

5) A few of the sectors that have been great so far are agri inputs and pharma, do you think they have more stem left in them for investors to enter right now?

We expect the rural economy to get less impacted and recover faster. It could be due to better farm produce, normal rainfall and heavy government support to the rural population by way of various schemes. All agri related sectors and stocks have already recovered sharply. In case of agro chemicals, most stocks have rallied by an average of 150% from their recent lows. They are either close to their 52 week highs or making new 52 week highs. Our price targets in most agro chemicals socks are way below their current market prices. Hence we would avoid agri-input stocks at this point of time. In the case of pharma too we would stay away from the sector for fresh investment. The BSE healthcare Index is just 9% away from its 2015 peak. Although earnings growth will be healthy for the pharma sector valuations is a concern. The BSE Healthcare Index is trading at ~24x on one year forward earnings. The average RoE of the sector has come down to 13-14%. Hence, in the context of lower RoEs we feel valuations are stretched.

6) what’s next for multiplex companies with the movies going directly to OTT platforms, is it the end for such listed entities?

Difficult to conclude that multiplexes will go out of business because of the growing importance of OTT platforms. Post the pandemic and lockdown the OTT platforms have gained prominence and people have got used to watching movies and series on them. We have seen few movies being directly aired on the OTT platform passing the theatres/multiplexes. In some of the developed markets we see both multiplexes and OTT platforms co-exist. We need to see how multiplexes do business in a normal growth scenario, say for example FY22/FY23. In India, metros and Tier-1 & Tier-2 cities have limited choice of entertainment. Hence, people would continue to go to malls and multiplexes when things normalise.