Revival in pvt capex, credit boost & adequate liquidity must for sustaining growth

NBFC business models are robust in the long run given the paucity of banking credit for the MSME segment. But the recent high growth phase for NBFCs, driven by relatively cheap funds from banks and mutual funds is behind us after the liquidity crisis post the IL&FS issue, said Shilpa Kumar, managing director and chief executive officer of ICICI Securities, in an interview with Ravi Ranjan Prasad. This will result in lower margins and slower growth for them, she added. Excerpts:

With 2018 coming to a close the market has been volatile as per expectations. But will the domestic market continue to display volatility in 2019 till the general elections results?

The dollar/rupee rate (+12.5 per cent) beat most asset class during 2018 followed by gold (+7.5 per cent), bonds (+4.6 per cent) and Nifty50 (+3.5 per cent). Mid- and small-caps under-performed significantly at -16.5 per cent and -31.36 per cent, respectively. It’s just not elections, the other major drivers of equity risk premium, which cause volatility for are India’s vulnerability on CAD (~3 per cent in Q3FY19) and combined fiscal deficit although we expect both the factors to improve going ahead thereby stabilising the rupee in the range of 69-73 for 2019 (assuming oil to be in the range of $60-70 per barrel). Election related uncertainty would be limited to H1CY19.

Amongst global drivers of equity risk premium, which will have a ripple impact on emerging markets like India are geo-political risks such as Brexit and the US-China trade war with their resolution timelines expected by Q1CY19 although a prolonged phase of uncertainty is not ruled out.

The GDP growth rate moderated sharply in the July-September quarter. What’s your GDP (gross domestic product) growth projection for FY19 and how it is going to impact equity market?

The NBFC (non-banking finance companies) sector credit growth is expected to decline and it could have implications for the growth in the MSME (micro, small and medium enterprises) segment. To some extent, banks regaining their credit appetite will be helpful. While growth in H1FY19 averaged 7.65 per cent, we expect the second half growth to come in below 7 per cent, taking the full year average to 7.2-7.3 per cent.

How do you see crude oil and rupee-dollar movement playing out in 2019 and their impact on the equity market?

Crude prices could continue to be volatile in 2019 and we expect it to move in a range of $60-70 per barrel. We expect current account deficit (CAD) and fiscal deficit to improve in FY20 (or CY19), which should allow the rupee to remain in a range of 69-73, which should have a marginally positive impact on the equity markets.

RBI on December 5 reassured NBFCs of liquidity support. Do you see NBFC stocks under-performing in the long run and banks doing better?

NBFC business models are robust in the long run given the paucity of banking credit for the MSME segment. But the recent high growth phase for NBFCs, driven by relatively cheap funds from banks and mutual funds is behind us after the liquidity crisis post the IL&FS issue. This will result in lower margins and slower growth for them. The liquidity issue is transient and as XX norms gets strengthened growth opportunities will remain attractive in the long run.

Are status quo on repo rate and possibility of rate not hardening but softening good news for the equity market?

Outlook for risk-free rate is a key driver of equity prices and indications of benign interest rates is a positive for equity markets.

IT, FMCG stocks delivered handsome returns in 2018 while telecom, PSBs, oil-marketing companies had a bad year. Which sectors you would bet on in 2019?

The banking sector will show improved growth going ahead, given the significant base effect and normalisation of earnings for corporate banks (aided by peaking NPA cycle and improving credit growth). Retail lenders will continue to show robust growth.

Despite challenging environment, consumption demand in terms of volume growth led by rural India has not disappointed (FMCG – fast moving consumer goods – and paints) and will continue to sustain. Growth of two-wheelers and 4-wheelers should rebound after the temporary slowdown.

Pharma growth is expected to be robust but recovery in the US market will be the key and we remain selective in this space.

The robust government spending will continue and its impact will be positive for capital goods companies, cement volumes, commercial vehicle volumes and road company revenue growth although weak private capex remains a worry and will continue to be an overhang on the above mentioned sectors.

Utilities will benefit from improving power demand and resolution of stressed assets. Metals and energy could see earnings growth challenges as commodity prices correct, while IT (information technology companies) could see some moderation in performance after a stellar 2018.

For sustaining high growth, the key determinants will be revival in private capex cycle, credit growth, adequate liquidity, stable policy and low real interest rates.

Foreign portfolio investors pumped in Rs 5,981 crore in equities in November while domestic flows in equity MF improved, which led to Nifty gaining over 800 points. Is it a good time to invest in equities?

It’s a good time to invest as companies with good business models are available at reasonable valuations. Given earnings outlook, investors could begin investing some part of their investable pool in tranches.

raviranjan@mydigitalfc.com

Columnist: 
Ravi Ranjan Prasad