Dalal Street Voice: We maintain our December 2022 Nifty50 target of 20200, says Neeraj Chadawar of Axis Securities

Investors should stick to the fundamentals where the earnings visibility is high, and we believe that sector rotation with a focus on quality and momentum will deliver superior returns moving forward, Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities said in an interview with Zeebiz’s Kshitij Anand. Edited Excerpts:

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Q) Omicron, US Fed taper fear infuses volatility in markets. Where do you see markets in the next 12 months or so?

A) Nov’21 was a tough month for equity markets as the global challenges of persistent inflation, faster than expected tapering of bond purchase program by the US Federal Reserve and new covid variant impacted the equity markets negatively.

Moreover, the new Covid-19 variant which has accentuated the challenges and its rapid spread (evading vaccination antibodies), may potentially derail the global economic recovery to a large extent.

Earnings scenario remains constructive:

During Q2FY22 earnings season, 36 out of the 50 companies beat or met consensus expectations. Post Q2 earnings, we (as well as consensus) further upgraded our estimates by 2% despite businesses witnessing significant margin pressure during the quarter.

Encouragingly, margin pressure is expected to ease out from Q3FY22 onwards owing to price hikes and softening of commodity prices which have already reduced from the heady levels of Q2. This will aid in margin improvement moving forward, leading to earnings visibility.

The market may not deliver stellar returns from here onwards as it has delivered in the last year, so expectations from the market need to tone down.

Volatility is likely to continue for some more time before we conclude on a concrete trend, as the direction of the new variant, Oil prices, and Dollar index will further drive the market fundamentals.

However, we are constructive on the market on a long-term basis, as the outlook for the market continues to remain robust.

Investors should stick to the fundamentals where the earnings visibility is high, and we believe that sector rotation with a focus on quality and momentum will deliver superior returns moving forward.

Considering the strong earnings trajectory, we maintain our Dec’22 NIFTY50 target of 20200, valuing it at 22x FY24E earnings.

Q) The Budget 2022 is also a few weeks away. What are your expectations from the Budget? Do you think it will be a populist one that could hurt the fiscal math of the government which is already strained due to COVID?

A) We are not expecting any extremely populist Budget 2022 but we believe that the policy reforms are likely to continue under the current government.

The GST collection witnessed an uptick as it topped at Rs 1.3 lakh crore for Nov’21, more than Rs 1 lakh crore for the last five consecutive months – an encouraging sign in terms of government tax collection and overall fiscal situation.

GST collection is likely to be robust in the upcoming months, given the increase in compliance which will help manage the fiscal math.
 
The broad focus of the budget is likely to be on job creation which could mean more impetus will be on infrastructure. The second focus is likely to be on credit growth which is still sluggish as compared to pre-pandemic years.

Q) Which sectors are likely to hog the limelight in Budget 2022?

A) India’s vaccination drive has crossed a remarkable milestone. More than 125 crore vaccination doses have been administered in various phases, which is a grand success for the country.

Till the Budget, a significant amount of the population is expected to be vaccinated with both doses. So, the Budget is expected to be growth-oriented, led by higher government spending that will be further helpful in gaining economic momentum.

We believe policy reforms like Atmanirbhar Bharat and the PLI scheme are likely to continue in 2022 and get further push. Infrastructure spending is expected to be a key agenda in the budget, with further push is expected on affordable housing.
 
Q) The year 2021 will also go down as a year of IPOs when many niche or new-age businesses got listed. How do you sum up 2021 in terms of primary markets and your outlook for 2022?

A) Indian primary market remained subdued in FY20 on account of multiple events. Slower economic growth in the domestic market and trade tension between the US and China in the global market had kept the primary market on backstage, and this was further fizzled out after the meltdown of IL&FS which had posted a liquidity crisis in the Indian financial system.

However, since Mar '20 bottom, we have seen a sharp rebound in the market, led by improving sentiments based on the opening up of the economy, better than expected improvement in high-frequency indicators, and the corporate earnings which are further supported by optimism over the vaccine.

The overall improved sentiments in the secondary market were the biggest driver for higher activities in the primary market during the last 12-15 months.

This brings recovery in the IPO market where the new promoters were rushing to the primary market to tap the opportunity. The recent spate of IPOs and their success indicates the appetite for mid and small-cap stocks.

With the opening of the economy, investors were looking out for new ideas and IPOs were the best opportunity to fulfill the rising interest towards the mid & small-cap companies in 2021. We believe the similar trend of 2021 is likely to continue in 2022.

Q) The year 2021 was volatile but bulls managed to remain in control. How do you look at 2021 – key highlights which stand out from a market, fund, or business perspective?

A) The Indian benchmark index Nifty has given stellar returns of more than 140% from the pandemic low last year. The Indian economy has also recovered sharply as COVID 2.0 gradually waned with a pick-up in the vaccination drive.

With new hope and confidence in the economic recovery, benchmark Nifty has advanced quite some distance and touched an all-time high of 18477 on 18th October, which stands 49% higher than the pre-pandemic high.

Last year, returns were broad-based primarily on account of better participation witnessed across stock categories as well as sectors that were relatively narrow in the pre-pandemic years.

The pandemic year has translated into better profitability for the Indian corporates led by cost rationalization practices and pent-up demand.

2022 now looks much brighter and more promising as cumulative and rolling net profit of NSE 500 universe for the last four quarters has touched an all-time high with loss-making sectors turning positive and significantly contributing to the net profitability. Moreover, ROE for the broader market is improving after a muted performance for several years.

Overall, the Indian market has entered in an earning’s up-cycle with an expectation of more than 20%+ growth in Nifty’s earnings in the next two years.

With faster economic recovery on the cards, more cyclical sectors are likely to join the rally with the expectation of higher government spending moving forward.

Q) FIIs remain mostly net sellers especially when it comes to the cash segment of Indian equity markets. How are FIIs looking at India in the light of sooner than expected tapering from the US Fed?

A) FIIs are selling not only in India but in all the major emerging markets on the expectation of faster tapering from the US FED.

The highest-ever FII inflows were witnessed in FY21 at $37 Bn, which stands higher than FY10/FY11/FY13 levels. However, in FY22 to date, FIIs pulled out only $ 2 bn (pulled out money is far below the FY21 inflows).

The short-term direction of the FIIs flows will further depend upon the outcome of the FED meeting while based on the positive economic outlook for the country and the expectation of double-digit corporate earnings, the participation from the FIIs is likely to increase going forward as the economic condition is emerging positive with the pace of vaccination drive.

Q) Which sectors are likely to hog the limelight in the year 2022?

A) We are constructive on the long-term perspective of the market, so our strategy is to stay invested in the market. Based on the economic and market development, we are bullish on the following themes which could deliver solid returns in 2022.

• The Small and Mid Caps are picking up steam and balance sheet leveraging is likely to play out in 2022 with an improved outlook on return ratios and profitability.

 
• Housing and Banking will be major themes to watch out for in 2022 on account of their improved outlook and current lower interest rate regime.

• The infra sector is an emerging theme as the government augments its spending in this space moving forward.

• Digital and Cloud will continue to remain major long-term structural themes.

• The demand for Home improvement has bolstered and continues to be robust in 2022

• Travel & Tourism stands to be a more promising theme, which has further gained momentum post a pick-up in the vaccination drive.

Q) Any particular themes that remained in limelight in 2021 and could well remain relevant and in demand in 2022 as well and why?

A) Digital and Cloud will continue to remain major long-term structural themes. Further, the outlook for mid and small caps is also encouraging led by improvement in return ratios and profitability.

Q) What were your key learnings from markets in 2021 which investors should take note of?

A) Every bull phase of the market will provide the opportunity to improve the overall health of the portfolio by correcting the mistakes.

In a bull market, prices go up over a period led by positive optimism over the economic recovery. In this phase, the fear of loss is very low which led to momentum in low-quality stocks.

Often in bull phases, investors are tempted to create higher holdings in low-quality stocks and end up with higher exposure to them.

Once the cycle turns then they make huge losses due to the less weightage given to the quality of the portfolio.

So, the key learning here is to invest in high-quality stocks where the earnings visibility is very high and limit the exposure to less quality (Fundamentally weak) stocks or overpriced stocks.

Q) What are the key risks that investors might face in 2022?

A) The path for 2022 will be different as compared to 2021. The market may not deliver stellar returns from here onwards as it has delivered in the last year, so expectations from the market need to tone down.

Inflation, rising crude prices, and the rising concern over the new variant are the key risks for the market. Further, the current rally is built on the expectation of earnings growth; any downward revision will create pressure on the valuations.

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