‘Sharp re-rating of market difficult amid rate hike expectations’ | The Financial Express

‘Sharp re-rating of market difficult amid rate hike expectations’

The Indian markets have stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling, says Ajay Menon, MD & CEO, broking and distribution, Motilal Oswal Financial Services.

‘Sharp re-rating of market difficult amid rate hike expectations’
India has stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling. (IE)

The Indian markets have stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling, says ‘Sharp re-rating of market difficult amid rate hike expectations’

The Indian markets have stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling, says Ajay Menon, MD & CEO, broking and distribution, Motilal Oswal Financial Services. In an interview with Ashley Coutinho, he says the driving force behind India’s outperformance is its domestic consumption-driven economy, which puts it relatively on a better footing compared to the developed world, which is struggling with high inflation and slow growth challenges. Edited excerpts:

How do you see the next year play out for the Indian equities?

India has stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling. This is reflected in Nifty performance, which, despite the volatility, is up 2.8% in the year to date, compared to a 10-30% fall in most of the global indices. The driving force behind India’s outperformance is its domestic consumption-driven economy, which puts it relatively on a better footing compared to the developed world, which is struggling with high inflation, slow growth challenges. The strong corporate earnings growth of 24% CAGR during FY20-22 proves this resilience. Going ahead, Nifty earnings are expected to robustly grow at 16% CAGR over FY22-24. The festive season has started on a positive note after the pandemic-induced disruption of the last two years. Corporates are undertaking capex after several years while credit has consistently been growing at 15-16%, the highest in the last nine years. So, we are positive on Indian equities from a mid- to long-term perspective, although intermittent volatility cannot be ruled out on account of global uncertainties.

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What is your take on current valuations?

Post the recent run-up, the Nifty is now trading near its long-term average of ~19.5x one-year forward EPS, which puts the valuation in a fair zone. Mid-caps are trading at a premium of 10-15% to the Nifty while the small-cap index is in an attractive zone of 14-15 P/E. With bond yields at 7.5% and expectations of more rate hikes ahead both globally and in India, we believe that a sharp re-rating of market is a bit difficult. However, as corporate earnings momentum continues, markets will keep gradually inching higher in line with underlying strength in earnings.

What are your expectations from the September quarter earnings season?

We expect Nifty companies to deliver a flat earnings growth on a YoY basis in 2QFY23, impacted by poor performance from global commodities. If we exclude metals and O&G, we expect Nifty to post a solid 30% earnings growth, led by BFSI and autos. Basically, sectors focused on domestic consumption or investments are likely to outperform the sectors dependent on global demand, cyclicals and commodities. Cement and healthcare would be delivering poor earnings. Margins for most sectors are expected to decline on a Y-o-Y basis, given the impact of inflation. However, with softening of commodity prices, margins are again expected to see a good rebound from 2HFY23.

What is your take on banking and NBFC stocks?

The banking system has been witnessing a healthy recovery in loan growth since October last year and has seen one way growth till date. While growth in the retail and SME segments remains strong, corporate segment, too, has started participating. Of late, the systemic loan growth has been touching new highs of 16-18% YoY, which was last seen nine years back. Though the macro environment is challenging and thus requires monitoring, we expect systemic credit to grow about 13%/14% YoY in FY23/FY24, respectively.

Demat accounts openings have slowed, while the number of active clients being added has significantly reduced in the past few months. Do you expect this to continue?

Retail has emerged as a strong force after Covid, and it, along with DIIs, counterbalanced FPI outflows since October last year and provided resilience to the Indian market. However, client addition has slowed since the start of this year, though capital market activity maintains its momentum across most parameters (volumes, orders) despite high volatility. Volumes in F&O for both equities and commodities have continued to surge. As more investors get to know about equity investments and its long-term benefits, client additions should continue as the equity participation is low at around 5%.

Also read: Adani Enterprises among 172 BSE stocks to hit new 52-week highs; Bandhan Bank, Reliance Cap at fresh lows

What are the key trends that you see emerging in FY23 for the broking industry?

Retail market share, both in equity (38%) and derivative segments (28%), continues to remain significant. There has been transition to a fee-based model from transaction-based model for certain products on the equity and derivative segments. Phygital is another model being adopted by brokers. A lot of focus is being laid on product, service innovation and client on-boarding along with operational efficiencies.

Could you give us a sense on the impact of peak margins on trading volumes in F&O and cash segments. Also, how will the diktat on running account settlement impact the industry?

The markets have adjusted to the peak margin norms as volumes continue to remain steady, both on the cash and derivative sides. Cash segment is stable YoY and derivative volumes have grown, too. Running account settlement has got implemented smoothly and had a very small impact on the cash segment for one-two days. Since the banking system and brokerage firms are equipped with good technology, brokers were able to deal with it without much disruption.. In an interview with Ashley Coutinho, he says the driving force behind India’s outperformance is its domestic consumption-driven economy, which puts it relatively on a better footing compared to the developed world, which is struggling with high inflation and slow growth challenges. Edited excerpts:

How do you see the next year play out for the Indian equities?

India has stayed resilient amid high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FPI selling. This is reflected in Nifty performance, which, despite the volatility, is up 2.8% in the year to date, compared to a 10-30% fall in most of the global indices. The driving force behind India’s outperformance is its domestic consumption-driven economy, which puts it relatively on a better footing compared to the developed world, which is struggling with high inflation, slow growth challenges. The strong corporate earnings growth of 24% CAGR during FY20-22 proves this resilience. Going ahead, Nifty earnings are expected to robustly grow at 16% CAGR over FY22-24. The festive season has started on a positive note after the pandemic-induced disruption of the last two years. Corporates are undertaking capex after several years while credit has consistently been growing at 15-16%, the highest in the last nine years. So, we are positive on Indian equities from a mid- to long-term perspective, although intermittent volatility cannot be ruled out on account of global uncertainties.

What is your take on current valuations?

Post the recent run-up, the Nifty is now trading near its long-term average of ~19.5x one-year forward EPS, which puts the valuation in a fair zone. Mid-caps are trading at a premium of 10-15% to the Nifty while the small-cap index is in an attractive zone of 14-15 P/E. With bond yields at 7.5% and expectations of more rate hikes ahead both globally and in India, we believe that a sharp re-rating of market is a bit difficult. However, as corporate earnings momentum continues, markets will keep gradually inching higher in line with underlying strength in earnings.

What are your expectations from the September quarter earnings season?

We expect Nifty companies to deliver a flat earnings growth on a YoY basis in 2QFY23, impacted by poor performance from global commodities. If we exclude metals and O&G, we expect Nifty to post a solid 30% earnings growth, led by BFSI and autos. Basically, sectors focused on domestic consumption or investments are likely to outperform the sectors dependent on global demand, cyclicals and commodities. Cement and healthcare would be delivering poor earnings. Margins for most sectors are expected to decline on a Y-o-Y basis, given the impact of inflation. However, with softening of commodity prices, margins are again expected to see a good rebound from 2HFY23.

What is your take on banking and NBFC stocks?

The banking system has been witnessing a healthy recovery in loan growth since October last year and has seen one way growth till date. While growth in the retail and SME segments remains strong, corporate segment, too, has started participating. Of late, the systemic loan growth has been touching new highs of 16-18% YoY, which was last seen nine years back. Though the macro environment is challenging and thus requires monitoring, we expect systemic credit to grow about 13%/14% YoY in FY23/FY24, respectively.

Demat accounts openings have slowed, while the number of active clients being added has significantly reduced in the past few months. Do you expect this to continue?

Retail has emerged as a strong force after Covid, and it, along with DIIs, counterbalanced FPI outflows since October last year and provided resilience to the Indian market. However, client addition has slowed since the start of this year, though capital market activity maintains its momentum across most parameters (volumes, orders) despite high volatility. Volumes in F&O for both equities and commodities have continued to surge. As more investors get to know about equity investments and its long-term benefits, client additions should continue as the equity participation is low at around 5%.

What are the key trends that you see emerging in FY23 for the broking industry?

Retail market share, both in equity (38%) and derivative segments (28%), continues to remain significant. There has been transition to a fee-based model from transaction-based model for certain products on the equity and derivative segments. Phygital is another model being adopted by brokers. A lot of focus is being laid on product, service innovation and client on-boarding along with operational efficiencies.

Could you give us a sense on the impact of peak margins on trading volumes in F&O and cash segments. Also, how will the diktat on running account settlement impact the industry?

The markets have adjusted to the peak margin norms as volumes continue to remain steady, both on the cash and derivative sides. Cash segment is stable YoY and derivative volumes have grown, too. Running account settlement has got implemented smoothly and had a very small impact on the cash segment for one-two days. Since the banking system and brokerage firms are equipped with good technology, brokers were able to deal with it without much disruption.

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First published on: 08-11-2022 at 00:05 IST