Asset quality concerns at PSBs seem to be fading away

The recent correction in mid- and smallcap has to be viewed in conjunction with the significant return (BSE midcap and BSE smallcap index with around 250 per cent return since September 2013 till December 2017). Such minor corrections after significant rally are normal and in fact desirable, said Pankaj Pandey, head of research, ICICIdirect, in an interview with Ravi Ranjan Prasad. In terms of MF flows, we don’t expect these structural SIP flows to slow substantially, he added. Excerpts:

The Indian equity market is scaling new highs on regular intervals since January. What’s the driving force?

The Indian equity market is driven by optimism on pickup in industrial activity along with robust consumer demand, aided by strong rural demand. It reflected in Q1FY19 earnings. The infrastructure, leading indicators (cement volume growth, tendering activity, etc.) also pointed out a marked improvement in capex activity outlook. The TINA (‘The­re is no alternative’) factor remains for equities, as physical assets stay unattractive while mo­nthly flows into equities continue, thereby keeping the underlying strength intact.

Foreign investors have returned to the Indian market in the past two months, but the flows are quite tepid and reversible. What’s is your take on FPIs investment behaviour?

While the foreign portfolio investment flows have been tepid here; outflows are seen in other key emerging markets (EMs), including Indonesia, Malaysia, Br­azil and South Africa. It’s being driven by the US, which continues to move on quantitative tightening and rate divergence path, and is brewing trade war with China as well as other countries. Most EMs have started to respond to this twin challenge by taking a more hawkish stance on rates and defending their currencies by using forex reserves. But India is a domestic driven economy with macro perspective looking relatively stable and the Reserve Bank of India’s response has been largely neutral.

Monsoon rains have been qu­ite uneven with deficient rains in eastern states and excessive in southern states. How will this impact the market?

The cumulative rainfall across India is below 7 per cent of LPA with precipitation near normal in the central and northwest regions (-6 per cent of LPA), surplus in the southern region (+11 per cent of LPA) while deficient in the northeastern region (-28 per cent of LPA). But in terms of distribution, 77 per cent of the country has received normal to positive rainfall, while 23 per cent deficient precipitation. We don’t expect this to cause any meaningful reduction in grain production, which stood at an all-time high in FY18. With adequate buffer stock, the same is not expected to be inflationary in nature as well. Domestic farm sentiment is positive largely trac­king double-digit rise in MSPs and fairly widespread rainfall distribution especially in the key agrarian states. Therefore, monsoon progress, so far, is likely to have a positive rub-off on the market sentiments.

What should be the MF inve­stment strategy when many mutual funds investors have seen their portfolio value shrink with selling in the mid- and smallcap stocks?

The recent correction in mid- and smallcap has to be viewed in conjunction with the significant return (BSE midcap and BSE smallcap index with ~ 250 per cent return since September 2013 till December 2017). Such corrections after significant rally are normal and in fact desirable. In terms of MF flows, we don’t expect these structural SIP flows to slow substantially. Lump sum flows, however, may continue to remain volatile on broader market environment and sentiment. Midcap and small fu­nds inherently are more volatile than largecap funds, especially after having significantly outperformed in the last 4-5 years. Thus, while lump sum may be avoided, SIPs should be continued with a long-term investment horizon.

Q1 earnings season is over. What’s your assessment of the corporate performance?

The Sensex firms (ex-banking space) reported stellar operati­onal performance in Q1, primarily driven by robust consumer demand and low base due to transition period before GST implementation (Q1FY18). Net sales for the quarter are up 24.2 per cent, which coupled with impr­ovement in Ebitda margin led to 27 per cent growth in operating profit. PAT for the quarter was up at 15.7 per cent YoY. Notably, asset quality concerns at public sector banks seems to be fading away with Q1 being the first quarter witnessing sequential (QoQ) decline in GNPA & NNPA. On the consumption front, the double-digit volume growth in the auto (~19 per cent YoY) and FMCG (~12 per cent YoY) space was also encouraging thereby depicting overall demand recovery. With worst behind us in the banking space, pickup in industrial activity and upbeat farm sentiment, we are eyeing a healthy 20 per cent earnings growth over FY18-20E.

The rupee has weakened and crossed the 70 per dollar mark; How it is going to impact earnings next quarter?

A weakening currency is fundamentally positive for export-oriented industries and consequ­ently, we expect sectors like IT and pharma to witness currency-related bump up in topline and profitability. Similarly, pockets with foreign debt and imports, would tend to be impacted owing to the rupee depreciation.

How do you see oil price mo­vement and its impact on the Indian equity market?

With a given demand scenario, the crude price is likely to be driven by supply side factors. While geopolitical events like Iran sanctions and Venezuela crisis have supported the upward trajectory in crude prices, continued rise in the US output has allayed the upward pressure on prices. Crude prices are expected to remain ra­nge-bound given the high probabilities of Opec deciding to raise output and continued supply gr­owth from the US. But risks to this assumption can’t be neglected. Any strong restrictions on Ir­an’s oil buyers can lead to supply disruptions. In case crude prices go up from the current levels, it might have a burden on India’s CAD as well as an inflationary impact in the economy.

Small and midcap indices are moving up again. What’s your view on broader Indian market versus the largecaps where a fresh rally is on since end June?

We continue to like broader market over largecaps. We also note that the market is witnessing a strong divide in valuations across quality and ordinary businesses notwithstanding market capitalization, which warrants that investors should be stock specific now. Emphasis should be on buying business, which are run in a capital efficient way and possess sustainable growth prospects.

Ravi Ranjan Prasad