Earnings visibility poor for next few quarters: Dy CIO of Nippon India MF

In a Q&A, Sailesh Raj Bhan says mid and small-caps look attractive from a 3-5 year perspective; bets on two-wheelers, pharma, telecom, utilities

Consolidation driven by balance sheet strength is visible in virtually every sector of the market, says Sailesh Raj Bhan, deputy chief investment officer (CIO)–equity investments, Nippon India MF. In an interview with Ashley Coutinho, he says mid and small-caps look attractive from a 3-5 year perspective. Edited excerpts: 

Q> What has led to the sharp rebound in the market in the past two months?

The sharp rebound is driven by many factors, liquidity being just one of them. The fall in March had taken valuations way below fair value given the uncertainty in confidence and cash flows for corporates and consumers. Many sectors such as pharmaceuticals, telecom, consumer staples and IT services have done well under the difficult conditions. Other segments like two-wheelers, consumer electronics and durables saw a recovery after the easing of lockdown. Global markets have staged a smart recovery in the last couple of months reflecting the growing confidence in managing through the health crises. Cheap oil and low interest rates also have been a supporting factor for the recovery in stock markets. Investors should enhance allocations of SIPs with a medium-term investment horizon, while continuing to follow a balanced asset allocation for their overall investment portfolios.

Q> How has lack of earnings visibility made life difficult for fund managers?

With a loss of nearly two months of overall economic activity due to the lockdown, earnings visibility is poor for the next few quarters. Some sectors will get more impacted than others. Keeping this in mind, we have increased allocation to sectors with higher earnings visibility like telecom, pharmaceuticals, utilities, IT services, consumers and rural demand driven businesses like two-wheelers. Consolidation driven by balance sheet strength is visible in virtually every sector of the market and the trend of shift in market share to organised players is likely to be even more pronounced than ever before.

Q> What is your view on mid- and small-caps?

The space is attractive from a medium-term point of view given the sharp fall in valuations since early 2018. Businesses which come out of the current crisis with intact balance sheets will gain market share as mortality rate is higher in this segment of the market leading to consolidation. Investment holding period in this segment should be longer than 3-5 years to really get a benefit of this opportunity.

Q> What is your assessment of corporate earnings growth?

Given the recurrent lockdowns in the first half of this financial year, corporate earnings decline will be significant in FY21. Recovery to pre-covid levels in corporate earnings will vary across sectors and be visible from FY22 onwards.

Q> What are the global cues to watch out for?

The sharp liquidity infusion and low global interest rates for an elongated period can create froth in many sub-segments of the market and need to be closely tracked. Any large upticks in global oil prices will also have considerable implications for Indian markets.

Q> Which sectors are you betting on?

We are overweight on two-wheelers, pharma, telecom, utilities given much greater stability in earnings and better outlook. Sectors like consumer staples, banking, NBFCs and oil and gas are underweight positions, due to valuations and business uncertainty over the next few quarters.

Q> What is your outlook on the pharma sector?

Pharma has a significant growth opportunity given the fundamental dynamics in each of its operating markets. Businesses across branded pharmaceuticals, diagnostics, hospitals, etc will see material value creation over the next few years. The US market has started to see lower pricing pressure supporting an improvement in outlook. New markets like specialty branded pharma in US, offer an opportunity for Indian players to scale up over the next few years.