Religare’s COO sees Covid wave as risk; bank stocks rise
04:55, 21 December 2021
Indian equities have retreated more than 10% from record highs reached two months ago, and look set for a second monthly decline in the longest losing streak since March 2020. That reflects heightened investor anxiety about inflation, compounded by uncertainty about new Covid-19 variants, Gurpreet Sidana, chief operating officer at Religare Broking in Mumbai, tells Capital.com.
Stock market valuations have surged to levels that have raised some questions about their sustainability, and the initial share-sale frenzy seen in Indian markets earlier this year may be over after investors burnt their hands in the nation’s biggest ever initial public offering (IPO) last month. New issues will not dry up but will likely receive a more measured market response from here, Sidana said.
Below are the COO’s responses to questions from Capital.com about the underlying sentiment, direction and expected trends in India’s equity markets.
Capital.com: How serious is the risk from Omicron?
Gurpreet Sidana: The new variant, Omicron, hit the globe while several countries were still struggling with the Delta variant. As a result, it initially triggered panic and a few countries even imposed local lockdowns as well. Its reaction was visible in the financial markets, as equity markets world over witnessed a sharp fall from their record highs. However, things have improved now and the recent updates have certainly subsided fear that the new variant causes mild symptoms while it is more transmissible than the Delta variant.
We feel after going through the two Covid waves in short successions, markets look more prepared to handle the situation more efficiently this time. Having said that, any other major negative surprise (rate hike, new variant etc) may dent the prospect of steady economic recovery, which in turn put pressure on financial markets as well.
CC: How much of the evolving situation has been factored into the market sentiment?
GS: The encouraging pace of vaccination is certainly a comforting factor for India. However, there’s no concrete evidence yet on how successfully the existing vaccines would help in tackling the new variant.
At the same time, markets have already corrected 10% from their record highs, factoring in the possibility of a dent to the economic recovery speed. But, it’s not sharp and widespread so far, which reflects a balanced response by the investors.
CC: Is the correction more fundamental change of bias?
GS: Markets were looking for a reason for some meaningful correction after a sharp rise since March 2020. In our opinion, we feel it’s a temporary phase as the news of a new variant as well as stretched valuations induced participants to take some profits off the table.
Fundamentally, the high-frequency indicators are showing signs of improvement but inflation remains a worry. Also, the earnings have been mixed in Q2FY22 (the second quarter of financial year 2022) but the management commentary suggested healthy growth prospects for H2FY22 (the second half of financial year 2022). The growth will be largely driven by the increase in demand, better product mix, cost-saving initiatives and price hikes. Markets may trade volatile in the short term but the long-term growth prospects seem strong.
CC: What are your views on equity valuations?
GS: We feel valuations are still on the higher side thus investors should focus on identifying the sectors/themes which offer long-term visibility and accumulate them in a staggered manner during this corrective phase. Within those sectors, they should look for stocks that have a strong long-term growth outlook, prudent management and a healthy balance sheet with low debt.
CC: What are the short-, medium-term risks and opportunities?
GS: The lingering fear of the third Covid wave due to the new variant will remain the key risk, at least in the short run. Although it seems that the virus is less severe, the updates on the same would keep the participants on the edge. Another important concern which markets are currently dealing with is inflation. The persistent rise in inflation would force the central banks to raise rates and tighten liquidity conditions which would impact the growth momentum.
At the same time, the rising investor participation is a positive sign for the markets. Moreover, India, being one of the fastest-growing economies in the world, would continue to remain one of the preferred investment destinations for foreign investors.
CC: Which are the sectors you recommend for entry, exit?
GS: Given the current scenario and future potential, we expect IT and banks to do well. Apart from these sectors, ease in the supply side issues would aid recovery in auto volumes and thereby stocks as well. Having said that, one needs to be selective and look for companies that can pass on cost increases and are available at decent valuations.
On the contrary, we are a bit sceptical of consumption-driven stocks due to the recent cost increase which could dent margins and profitability. Additionally, power stocks have seen a sharp run-up in anticipation of faster adoption of renewables. However, valuations look rich and therefore we would remain cautious.
CC: What is your assessment of the primary market?
GS: We have been seeing noticeable traction in the primary market for the last two years however the weak listing of Paytm did hit investors’ sentiment for a brief moment. We feel investors are now cautious about the IPOs, which are commanding rich valuations and lack financial stability. On the other hand, companies offering valuation comfort and strong growth prospects are still attracting noticeable interest and we expect this trend to continue.
CC: What approach to IPOs are you suggesting to clients?
GS: The buzz in primary markets has indeed been consistent with the surge in the secondary market and overall bullish sentiment. We feel the trend may continue given the liquidity situation and listing of the businesses, which are new age and offer promising growth prospects.
We selectively pick businesses based on their valuation, financial trend and growth potential and recommend our clients to maintain a long-term perspective while applying to those IPOs. We feel the chances of going wrong are high when you plan only for listing gains without considering other critical factors.
CC: What are the key takeaways from last quarterly corporate earnings?
GS: The Q2FY22 earnings were a mixed bag. In terms of hits, the banking sector stood out as some of the large banks posted a strong set of results with healthy loan growth and more importantly a resilient asset quality. Even the IT sector, where the expectations were high to begin with, posted strong results with most management retaining their growth guidance. On the flip side, auto and consumer durables’ results were a miss as an increase in input cost impacted margins and overall profitability.
From the medium- to long-term perspective, we expect overall earnings to revive further largely led by a recovery in the economy, improvement in demand, product mix and capacity expansion. Besides, to protect margins, companies plan to take price hikes as well as continue with cost-saving measures.
CC: Any specific policy measure or initiative you expect?
GS: The government should maintain its focus on increasing spending in social sectors like infrastructure, which will not only help generate employment but also bolster consumption. Further, the markets would keep a close watch on the progress of disinvestment by the government. Moreover, with the budget (being) just two months away, expectations would increase from the government to provide impetus to economic growth and continue with the aids and other needed support to help certain distressed sectors that are still struggling to reach the pre-Covid levels.