Investors burnt their fingers in small- and mid-caps, says Motilal Oswal

Motilal Oswal expects the slowdown in the economy to last at least two more quarters

Developments back home and at the global level have kept the markets volatile over the past few sessions. MOTILAL OSWAL, managing director, Motilal Oswal Financial Services, tells Puneet Wadhwa that he expects the slowdown in the economy to last at least two more quarters. The fast-moving consumer goods (FMCG) sector will lead the recovery, he says. Edited excerpts:

What is your market outlook?

The equity markets, post Budget 2019, have taken a negative view on some of the measures that were rolled out. That said, the markets will slowly look up from here. Interest rates are already low and by end 2019, if corporate earnings return, the Nifty50 can move closer to the 12,000-mark. We are extremely hopeful that the government will take a lot of positive steps which will enable the economy to do well and be supportive of the private sector. By March 2020, the Nifty50 will remain in the range of 11,800-12,200.

Do you think there is a ‘crisis of confidence’ among retail investors?

I think a ‘crisis of confidence’ is more evident in wholesale lending. Retail investors have burned their hands in small- and mid-caps, which has dented their confidence. However, with the recent flurry of measures by the regulator (and more likely to come in from the government as well) will help improve sentiment for the markets and eventually for investors. Retail investors can start investing in equities now, as most good stocks are available at attractive valuations. They should use the mutual fund route and invest systematically for long-term wealth creation. 

June quarter earnings have failed to lift market sentiment...

We expect 18-20 per cent Nifty profit growth for FY20, led by corporate banks like HDFC Bank, ICICI Bank, State Bank of India and Axis Bank.  Sectors that offer valuation comfort at this stage are automobiles, utilities, health care, non-banking financial companies (NBFCs) and select stocks in the banking and consumption segments. We are overweight on private banks, consumption, information technology (IT), industrials. We are underweight on metals and oil & gas.

When do you see a recovery?

The current slowdown will continue for least two more quarters. Among sectors, FMCG will lead the recovery, as it’s a low ticket item. 

How is the liquidity situation?

The liquidity situation has improved in the last three months. But the flow of credit needs to improve further for confidence to return. Foreign institutional investor flows should turnaround if the government addresses surcharge-related concerns with respect to foreign portfolio investors. Retail flows are likely to continue via systematic investment plans.

How is retail broking doing?

We have not seen much impact on brokerage earnings, as there is decent volume growth in the market. However, due to subdued market conditions and a change in regulations, there are lower earnings from the distribution division. Further, profitability is impacted on account of mix change in favour of the low-yielding futures & options (F&O) segment. Our retail broking business continues to focus on gaining cash market share, along with cross-selling and new client acquisition. Despite a challenging market environment, this business will perform well and be able to maintain its profitability.    

What is the overall revenue mix for Motilal Oswal Group?

The biggest chunk to revenue mix is contributed by the capital market segment at 42 per cent, followed by asset & wealth management at 29 per cent, home finance at 23 per cent and the fund-based business at 5 per cent. This percentage will change more in favour of linear businesses like asset & wealth management and the home finance businesses. These two businesses have huge headroom to grow.

How is the home finance business doing given the liquidity issues?

The segment has seen challenging times in the recent past and is now stabilising. Currently, the loan book stands at Rs 4,300 crore. Profitability will improve, led by an expansion in yields, coupled with a likely reduction in the cost of funds backed by rating upgrades. In FY20, profit growth for AMC business would be moderate, but much higher for the home finance business as compared to the last year on the back of lower incremental credit cost.