Dalal Street Voice: Mitul Shah of Reliance Securities sees FII flows returning by 1HFY23; Nifty50 at 20,000 by December 2022

Mitul Shah, Head of Research – Institutional Desk at Reliance Securities Ltd expects FII inflows to return in 1HFY23, while the DII investments would continue in 2022, and equities would outperform with double-digit returns. Our year-end 2022 target for Nifty is 20,000 at 22x FY24E earnings.

Shah has over 17 years of work experience in the industry. He has been actively tracking auto and auto ancillary companies for the past 11 years as a lead Analyst.

In an interview with Zeebiz's Kshitij Anand, Shah said that if crude prices remain high at $120/bbl for a year, it could impact GDP by 2-3% and add 1% to inflation.

Edited excerpts:

Q) Bulls have taken a back seat as bears took control, pushing benchmark indices below crucial support levels. What is your take on markets?

A) Market may remain volatile due to the Russia-Ukraine crisis. The trend in global equities, movement of rupee against the US dollar, and crude oil prices will dictate the trend in the near term.

Yes, the bulls have taken back sheen for a while. However, the Indian economy is in better shape given the underlying stellar corporate earnings momentum, the cleansed balance sheets, improving asset quality of the banks, levers in place for capex cycle revival and credit off-take, probable manufacturing resurgence given PLI and other government reforms.

This coupled with increasing DII participation can revive the markets sooner than expected once prevailing clouds of uncertainty disappear.

However, in the near term, the ongoing geopolitical issue would have negative bearings on global equity markets including Indian equities.

We expect FII inflows to return in 1HFY23, while the DII investments would continue in 2022. Equities would outperform with double-digit returns. Our year-end 2022 target for Nifty is 20,000 at 22x FY24E earnings.
 
Q) Crude oil nearly hit $140 mark. What is the kind of impact you see on markets, the economy, and India Inc.?

A) India net imported 1.25 bn bbl of oil in the last 12 months, which is expected to increase to 1.5 bn bbl/year, higher prices are likely to lead to higher import bills and also push prices of gas, coal, edible oil, and fertilisers upwards.  

At these prices, demand destruction would be a global phenomenon. Further, the current oil price spike is due to a lack of clarity on procedures; Russian energy is sanctioned.

We expect crude oil should correct from the current level of US$120/bbl, but if it remains high at the current level for a year, it could impact GDP by 2-3% and add 1% to inflation.

India imports 45%-50% of energy needs and any further rise in energy prices is likely to impact growth. Though India's dependence on imported energy as a percentage of GDP has fallen in the last couple of years, but it remains high at 3% in FY22.

If current prices sustain for a year, the impact on the balance of payments and productivity, in our view, can hurt FY23 GDP sizably.

The impact on CPI could be 100bps, given the rise in edible oil, and second-order effects from freight, as well as pass-through in FMCG.

Q) Will rising crude oil impact earnings growth in the March quarter?

A) Crude prices have made a new high after a sharp increase in the last few days, amid the possibility of US sanctions on Russian Oil. The overall situation is worsening for most of the sectors.  

As crude price increase, it has a direct co-relation with Petrol and diesel prices, which is inversely related to consumers’ affordability.

We see some impact of rising crude oil prices in March quarter’s earnings, as Crude price shot up in the March month only.

Higher RM cost visible in 9MFY22 which impacted the margin across sectors and likely to remain at an elevated level in 4QFY22.

Higher crude price impacts raw material cost, freight cost, power and fuel cost, energy cost, etc for manufacturing companies, which certainly impact earnings due to limited ability to pass on cost inflation to the consumer in this environment.

Q) What is the kind of impact you see on markets as well as reforms post-state election results?

A) The Indian equity market has been on a strong footing in the past year, largely backed by a strong earnings cycle and a robust macro-economy.

Several policy initiatives such as lower taxes, PLI schemes, and higher infra spend and Make in India initiatives.

Also, prudent policy measures helped India Inc. weather the pandemic crisis deftly leading to better-than-expected earnings performance.

Along the way, the RBI too has been supportive of its policy measures. With positive state election results market has been cheering it and appreciated the outcome.

Q) There is no stopping of FIIs as they pull out more than Rs 18000 cr from the cash segment of Indian equity markets in just 3 sessions. What is the trend you foresee for FIIs amid the US Fed rate hike possibility and Russia-Ukraine war?

A) During October 2021 to till date FPIs have sold worth Rs 1,448bn, which is compensated by DIIs by buying Rs1,412 bn in the same period.

In the past, we have observed that volatility in the market persists till the announcement of first the rate hike by the US Fed, post that it settles down and flow in equities resumes.

We expect a similar trend this time. We expect FII inflows to return in 1HFY23, while the DII investments would continue in 2022. Equities would continue with the outperformance with double-digit returns.

Given the current scenario of a tepid return from fixed incomes globally and a continued soft monetary policy by the global central bankers, we expect a rebound in FII investments in Indian equities by the beginning of FY23.

Though the Fed’s tightening measures and inch-up in interest rate would play important roles in 1HCY22, 2HCY22 would witness a reversal of flows due to the strong economic factors and India’s strengthening position in the global manufacturing arena.

Moreover, despite the rate hikes, returns from fixed income instruments would remain much lower than the historical average and lower than the long-term equity returns.

Factors that should essentially continue to attract FII inflows to Indian equities include:

(a) better return prospects, as the Indian economy is still set to deliver better returns versus several developing and developed nations;
(b) stable government and a slew of reforms undertaken by the government; and
(c) improved visibility on the corporate earnings front.

The average downside in the Indian market is 16-17% in the past few wars, while the recovery was 23% in 3 months and 34% in 6 months. During the Russia-Ukraine war, NIFTY fell 13% from its peak of 18,600.

Q) Amid Gloom and Doom are there any money-making opportunities that investors can grab?

A) While there are huge expectations from 2022, as the economy has already witnessed an initial phase of recovery in 2021, an all-around recovery is yet to be seen in 2022.

Further, tailwinds in certain sectors should continue to prevail in 2022 as well. For instance, migration to cloud-based services by corporates owing to the hybrid culture has immensely benefited the IT companies in 2020 and 2021, which is evident from the record surge in new deal wins by several IT companies.

Moreover, India is at the cusp of a Capex revival, which should benefit the Capital Goods and Engineering sectors. The automobile is also another promising sector on the back of likely demand revival and better supply.

We believe that the next decade would witness a massive transformation on the EV front, and the first phase of inflexion point in EV adoption would start in 2022, with many EV makers and companies associated with the EV ecology plan commencing operations in the next 1-2 years.

Moreover, the government’s thrust on EV over IC would boost innovation, development and localization. This would also lead to the need for green energy, and this sector would continue to maintain a higher investor interest as ESG is gaining momentum across the investment community.

Q) Given the fact that the market is down more than 10% from highs – any mistakes (1-5) that investors should avoid making as volatility increases?

A) Indian equities fell 13% from their peak due to the ongoing Russia-Ukraine conflict, the anticipation of an aggressive rate hike by the Fed, firming crude oil prices, and relentless selling by FPIs.

Investors should avoid high PE stocks and focus on quality companies at discounted valuation rather than buying high growth stories at expensive valuation. Use current dips to build a long-term quality portfolio.

Q) How can investors look at asset allocation (considering he/she is in the age bracket of 30-45 years)? Is it time to reduce equity in the portfolio and increase the percentage of debt?

A) As the market is down 13% from the peak, one should increase the equity portion and reduce debt market investment for the age bracket of 30-45 years.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)