Coronavirus key risk to expected recovery in Indian economy: Gaurav Dua
We can expect returns in line with growth in earnings for the Indian markets in FY2021.
We expect Sensex companies to post growth of 14-16 percent in aggregate net profits for the year FY21 and also expect the CNX Midcap index to outperform the benchmark Sensex/ Nifty this year, Gaurav Dua, Senior VP, Head – Capital Market Strategy & Investments at Sharekhan by BNP Paribas said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Most experts/economists feel the economy has bottomed out. Do you agree with them?
The current quarter of Q4 (January-March quarter) FY20 could also be weak in terms of the real GDP growth figures. However, we expect improving trend from Q1 (April-June quarter) FY21 on the back of healthy agriculture output leading to easing of rural stress along with support from the measures taken on monetary and fiscal policy front.
The low base effect would also kick in from the next (Q1FY21) quarter. However, the recovery is likely to be gradual. Moreover, one needs to carefully monitor the fallout of the outbreak of Corona virus on the EXIM trade and global economy -- a key risk to the expected recovery in the Indian economy.
Q: What are your thoughts on earnings growth going ahead? And do you really see overall 15-20 percent kind of growth in FY21?
We are quite positive on the revival of growth in corporate earnings in the coming quarters for two key reasons: 1) expectations of a gradual recovery in Indian economy and its positive rub off on corporate earnings; 2) Improving health of corporate lending banks (especially private banks along with large PSU like State Bank of India) which would provide a huge beta to the overall earnings growth in FY2021. We expect Sensex companies to post growth of 14-16 percent in aggregate net profits for the year FY2021.
Q: PSU banks are still facing some NPA pressure, but private banks have been outperforming PSUs. What is your pecking order?
We continue to be cautious on public sector banks except from SBI. On the other hand, we are positive on private sector banks with preference for HDFC Bank and Kotak Mahindra Bank among retail focused banks. Among corporate lenders, we prefer ICICI Bank and Axis Bank. Our order of preference among banks is as follows: ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Axis Bank, State Bank of India.
Q: Pharma sector has been gaining traction in last several weeks, especially there has been buying in quality largecaps and midcaps. Do you expect the sector to outperform going ahead?
We have a neutral view on pharma as a sector. Within the sector, we are extremely selective and prefer bulk drug makers and niche businesses rather than generic formulation companies. We believe that the generic formulators like Lupin, Sun Pharma, Cadila Healthcare among others would continue to lag due to pricing pressure in US along with concerns related to US FDA audits of manufacturing plants.
The supply disruptions of bulk drag to these generic formulators from China could be another source of negative that could adversely impact financial performance. On the other hand, the bulk drug focused and niche business like Divi's Labs, Biocon, Larus Labs are better placed and are likely to outperform going ahead also.
Q: Auto sector continued to show weakness on yearly basis, but sequentially the performance was better in Q3. Do you think the problems for the sector are over for now?
Performance of auto companies are expected to improve incrementally though the implementation of BS-IV norms from April could put additional pressure in the near term. However, it would be better to be selective as the auto sector would take couple of years before it gets back anywhere close to double-digit kind of growth rates in volume sales.
We prefer Mahindra & Mahindra among 4-wheelers and Bajaj Auto among 2-wheelers. In the auto ancillary space, we like Balkrishna Industries, Exide Industries and Apollo Tyres.
Q: Last year, Indian markets gave 14 percent return, but US indices rallied over 20 percent. Do you think our markets will outperform US in next one year?
We can expect returns in line with growth in earnings for the Indian markets in FY2021. It would not be fair to compare it with US markets where more than 2/3rd of gains have been contributed by just 4-5 companies due to massive flows into passive funds whereas the rally in Indian equities is likely to be much more broad-based this year.
In fact, we expect the CNX Midcap Index to outperform the benchmark Sensex/ Nifty this year.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Original Source: https://www.moneycontrol.com/news/business/markets/coronavirus-key-risk-to-expected-recovery-in-indian-economy-gaurav-dua-4972851.html