Unmesh Sharma is the Head of Institutional Equities at HDFC Securities.
Unmesh Sharma believes that multi-decadal deflationary trends will eventually overcome inflationary trends. In the interim, however, there is a risk of miscalculation. “A spike in yields would derail markets — in any case the US market is showing signs of fatigue,” said Sharma, Head of Institutional Equities at HDFC Securities, in an interaction with Moneycontrol.
December quarter earnings season will kick off for IT majors this week. “We believe that earnings will be broadly a replica of the last quarter. Among the large sectors, we are most positive on earnings for Large Banks and IT. Changes in FY22/23 earnings forecasts will be minimal,” says Sharma, a CFA charter holder and alumnus of IIM Lucknow, who has about two decades of experience in the capital market.
Edited excerpts from his interaction with Moneycontrol follow:
Companies will start releasing their December quarter earnings scorecard this week. What are your large earnings expectations and do you expect the earnings upgrade to continue?
We do not expect any fireworks this quarter. In that sense, it will be similar to last quarter. We will see some changes, especially in sectors that will be impacted by the recent surge in Covid cases. However, these do not have a large contribution in aggregate earnings. On balance, changes in FY22/23 earnings forecasts should be minimal.
Which are the sectors that will report strong earnings growth and weak results growth in the quarter ended December 2021?
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Our research team believes that earnings will be broadly a replica of the last quarter. Among the large sectors, we are most positive on earnings for Large Banks and IT. In addition, select consumer discretionary names, Real Estate and Capital Goods firms should do well.
Last quarter saw the effects of inflation on earnings. The tail end of this trend will show up though offset by pricing action and hence companies like Cement and Paints companies should see earnings mostly recover from recent weakness in input costs.
On the other hand, we expect muted earnings in companies that are exposed to rural growth. FMCG, Autos (notably two-wheelers) and smaller banks/ lenders will be impacted by this trend.
Apart from earnings, the key event to watch out for in near term would be Union Budget 2022. Do you think it will be a populist budget, considering the State elections ahead? What are the overall focus areas, especially on the tax front?
Our consistent view has been that over the years, the relevance of the Union Budget from the market’s perspective has reduced. The government has been taking decisions throughout the year, not waiting for the single-day event of the Union Budget presentation. Added to this is the increased contribution of States to overall expenditure.
Indeed, we are keeping one eye on the event as it is topical. We do think the budget will be pro-growth and expansionary. The government has the fiscal headroom, given buoyant tax collections. Also spends have been muted YTD (year-to-date), leaving enough room to expand. Specifically, we expect an increased focus on driving investments and credit towards the Infrastructure and Agri/ Rural sectors. For the government, the lowermost section of society will be top of mind. Indeed, this section has borne the greatest brunt of Covid disruptions. Needless to say this would also help any incumbent in their electoral agenda.
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Analysts largely expect the LIC IPO to take place in the first quarter of CY22. Will the government focus more on monetisation in Budget 2022?
We believe that in many cases, Covid only led to acceleration of trends that were already in place. Asset monetisation is one of them. We believe this will continue into FY23. From a timing perspective, the LIC IPO is imminent — the accounting year is a minor detail. Stake sales in other PSUs like BPCL, National Monetisation Pipeline etc will remain near the top of agenda. Combined with tax buoyancy, this will release fiscal headroom for a multi-year infrastructure investment programme.
Which sectors look attractive for value buying now and why?
At an aggregate and sector level, there are no obvious pockets of value. However, our core philosophy at HDFC Securities Institutional Research remains bottom up. In this context, we are positive on economy and market facing sectors and companies with pricing power, as opposed to rural demand themes and companies with weak pricing power in an inflationary environment.
Our model portfolio includes select names within Large Banks, Large Cap IT, Cement, Gas Utilities, Capital Markets, Consumer Discretionary and Economy facing sectors such as Real Estate and Infrastructure.
On the other hand, we see no obvious triggers for FMCG names. While we have cut our underweight position in Auto, we remain underweight on the two-wheeler space.
After a 20 percent-plus rally in 2021, how will the market look in 2022?
As mentioned above, at an aggregate level, with the market trading well in excess of 20x FY23 PE, we do not see value. The market will remain range-bound (single digit positive or negative returns) with increasing volatility as we get closer to key policy decisions. Active portfolios will deliver positive returns though. We believe a ‘back to basics’ approach will work — i.e., stock specific value hunting in the sectors listed above.
Omicron cases have been increasing in India as well as globally. Do you still count it as a major risk for global markets in 2022? What are other risk factors that can dent market sentiment in 2022?
Indeed, Omicron (and newer variants) remain a key risk, which one cannot rule out. However our view at this time remains that the government machinery, people, corporates and the markets have and will continue to learn how to deal with the news flow better. Portfolios need to be built for increased volatility.
In our mind, however, the Central bank action remains the single biggest risk to markets. While we believe that eventually the multi-decadal deflationary trends will overcome inflationary trends, in the interim, there is a risk of miscalculation. A spike in yields would derail markets — in any case the US market is showing signs of fatigue.
When it comes to external vulnerabilities, India remains well placed relative to other emerging markets, as compared to 2013. Hence our market would be among the least affected by any taper tantrum. We do believe that Central banks and governments are working closely together and hence the risk is low. But it exists.
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