It'll be a positive surprise if earnings grow in FY21, says Jigar Shah

With the country mid-way through the lockdown triggered by the rampant spread of coronavirus, Jigar Shah, chief executive officer, Maybank Kim Eng Securities, tells Puneet Wadhwa that industry expects a gradual opening up after April 14. Slowly, supply chains would resurrect and then as demand picks up, the capacity utilisation can again become normal, he says. Edited excerpts:

Can the markets slip more before they stabilise?

This is a different type of crash, which affects both real and financial economy. It doesn't help that before this unnatural and unexpected crash, valuations were at an all-time high in the US and many other markets. The year-to-date (YTD) fall in broad indices is less than that seen in 2008, but has happened at a much rapid pace. Loss of absolute market capitalisation is bigger. Further fall will depend on whether the coronavirus (Covid-19) situation lasts beyond May-June 2020.

Are the markets factoring in an extension in the 21-day lockdown?

As of now, the expectation in business and industry is that a gradual opening up will be allowed after April 14. This doesn't mean complete normalcy; but slowly, the supply chains would resurrect and then as demand picks up, the capacity utilisation can become normal. That could happen towards the end of September quarter, and be followed by a strong recovery in the October-March period.

What is the worst we can see in the Sensex and the Nifty over the next few months?

It is difficult to assess the quantitative impact on corporate earnings but the Bloomberg consensus of over 20 per cent increase in one-year forward Nifty earnings seems unlikely. In the last 20-year record, the trough price-to-earnings (PE) for the Nifty was 13-14x, which is still 19x on trailing 12-month basis. Thus, if the virus situation worsens, there will be more downside in the market.

How are you reading into the measures announced by the government and the Reserve Bank of India (RBI) thus far?

The RBI and other central banks have been supportive in cutting rates, creating additional liquidity, and managing the forex situation. Despite such an unprecedented collapse of equities driven by foreign investors selling, the rupee is quite resilient so far. However, the RBI cannot be engaged in recreating demand and employment, and the fiscal policy will have to take over from there.

How is the mood among foreign institutional investors (FIIs) as regards India?

FIIs have sold across emerging markets and India is no exception. A large amount of selling is by long-only funds and pension funds. This could be because of the pressure of redemptions or policy of creating cash in extraordinary times. The market crash has created significant opportunities for investors. It is a unique situation where high-quality companies are available at undemanding valuation, which happens rarely. Foreign flows can become positive again from September 2020, if global and local macros start to improve.

How bad a dent will we see in corporate earnings for FY21?

It's not possible to quantify at present but clearly, the gross domestic product (GDP) growth forecasts have been slashed by up to 200 basis points (bps) for FY21. Earnings growth may return only in FY22. In FY21, positive earnings will be a positive surprise.

The Street has been bullish on the fast-moving consumer goods (FMCG) and telecom sectors despite the government-imposed lockdown. Your views?

Yes, because these two sectors have faced less destruction compared to other sectors. Telecom, in particular, is not vulnerable to Covid-19 as data has emerged as the saviour of the population locked down at home and is booming. The consumption growth rate is a concern in the medium-term because before the crisis, it was down to 5-6 per cent versus 16 per cent some three years ago. Because of the Covid-19 impact, the growth rate will remain subdued and PE ratios of good FMCG companies are still not a bargain in the near term.

Do you see a rise in non-performing assets (NPAs) for banks and non-banking financial companies (NBFCs) over the next few quarters?

The entire financial sector may be the worst affected because of the Covid-19 pandemic. This is because of the pressure of additional NPLs (non-performing loans) and flight of deposits from some banks. NBFCs will find it difficult to secure new funds and the cost of funds will rise. Of course, there would be exceptions. A lot of this pain is already visible in stock prices, but more is possible if there are asset-liability mismatches and no recapitalisation because of the weak capital market condition. A lot of consolidation may take place in the sector, especially among NBFCs wanting to merge with banks. The government and the RBI may need to relax some regulations to allow such mergers and also bring down the 51 per cent government shareholding norm in state-owned banks to augment capital.