Nifty could shed 22% if lockdown is extended till May: Axis Securities CIO

In a Q&A, Naveen Kulkarni says earnings growth for F21 could go down to minus 15 per cent, depending on the extent of extension

The covid-19 outbreak has seen markets the world over tumble. Yet, there are further downside risks with possibility of the Nifty falling another 16-22 per cent says, Naveen Kulkarni, CIO, Axis Securities. In an interview to Vishal Chhabria, he see earnings growth for FY21 to trend in the range of 5 per cent to minus 15 per cent, depending on how long the lockdown  is extended. Edited excerpts:

What is your view on the coronavirus outbreak, and how long and deep will its impact be for India?

It is now very clear that there will be a significant impact on the Indian economy and equity markets. The bigger question now is the quantum of impact, which depends on the duration and effectiveness of lockdown. If the lockdown ends by April 15 (highly unlikely in our view) then the impact will be quite manageable and the Indian economy will grow by about 4 per cent in FY21. However, with each passing day, the impact on GDP will be significant. But more than the impact on GDP growth, the impact of balance sheets of enterprises and people will pose greater long-term challenges. A lockdown into May poses very high degree of recessionary risks.

How much more downside is there for markets from here on?

There are global and domestic forces at play. If the US market shows signs of revival, it will provide some support to the domestic market. However, India’s case is completely based on the duration of lockdown. Longer the duration and uncertainty surrounding the lockdown period, markets will be volatile and more likely to correct. So, if we were to build a worst-case scenario, then we could be looking at lockdown extending well into May and Nifty earnings around Rs 470-500 for FY21. Considering the balance sheet challenges that might crop up, we could be looking at a markets bottoming in the range of 7,000-7,500.

Global central banks are loosening their purse. Usually, when money becomes cheap globally, riskier assets get more attention. Will it be different this time due to coronavirus?

The way I think is, why would the central banks have done this? Is cutting rates a straightforward solution to the challenges of coronavirus? It intuitively doesn't seem to be the case. The reason being that, if people are sitting at home, they can't go to work, then how is cutting off interest rates going to help. But on the other hand, whether that can stoke a long-term demand curve, the answer is yes. So, asset prices will hold because of that. Central bankers not just tend to manage prices, but they manage the expectation of prices. If the expectation of prices over the longer term is that it is going to look up, then more likely people will start making that purchase decision at some point in time. So the important takeaway is that, more likely it is going to stoke demand for riskier asset. Maybe at a later stage, but it will come with a very big bang. Thus, over a longer term, risky assets especially equities will see more allocation.

How do you expect Nifty earnings to pan out in FY21?

It's a tricky scenario. Just to break the growth in terms of various components: BFSI (banking, financial services and insurance) is still a large part of the index at almost 40 per cent. Moreover, the contribution of growth in earnings from BFSI over the next one year was expected to be even higher because of State Bank of India, ICICI Bank and Axis Bank contributing a significant portion of the growth. However, the BFSI scenario has changed completely with lockdown. The retail segment, which has been the most critical component of growth, is likely to see NPA challenges. In this scenario, the earnings growth will be closely linked to the lock down period. The longer the duration, earnings will get that much compressed. To estimate, earnings growth for FY21 will trend in the range of 5 per cent to minus 15 per cent, depending on whether the lockdown period is 21 days or 45.

What is your view on commodity prices, including metals?

That's going to be a challenge. One is what kind of capacity comes up globally. If for one quarter there is a lull, then the capacity expansion is going to take a backseat. Second, all commodity prices are very sensitive and can fall or rise by 5-6 per cent in a day. Except for gold, they are not a store of value. So, at least the first 9 months of FY21 is going to be soft.

Regarding gold, most of the rally has happened. I doubt if there is much steam left there. It might move up slightly, but overall it should stabilise at current levels.

So, which stocks would you buy?

Across the board, we're seeing a lot of value. In banking, stocks like ICICI Bank, HDFC Bank and Kotak Bank have corrected and look attractive.

The palpable tariff hikes that we have seen, and there could be more hikes coming in the next one year, makes telecom very attractive. It could deliver a lot of value over the next 2-3 years. Companies like Bharti Airtel and Jio (through Reliance Industries) look good.

In retail, Titan offers value considering that it is a long term growth story, with consistent 20 per cent growth, management quality is excellent, consistent delivery in terms of their guidance, etc. Consumer stocks like Dabur and Marico are also placed well to ride through the challenging environment.

Any hopes on Vodafone?

Looking at the stock and the company are two different things. Stock, I am sceptical as debt burden is too big, and the erosion in market share is very significant. Fundamentally, I see huge challenges for them to surmount, which are not possible without an external help.

In mid and small caps, which are the areas to look at?

In this environment Midcaps and Small caps will see varied set of challenges. However, there are good long-term plays in the Midcap space like the Chemicals segment, Alcoholic Beverages and others. Small caps should be avoided at this juncture.

How would you deal with PSU stocks?

They have their own set of challenges, one being the huge supply of shares. Yet, NTPC and Coal India are good contra plays given the solid dividend yield they offer. A 15 per cent bounce-back cannot be ruled out. RITES also looks attractive.

Whenever the next bull phase starts, which stocks will lead?

Initially, of course, the large caps will drive, followed by quality mid-caps. Typically, BFSI moves up quite fast and then we could see consumer durables and retail follow, as they have a high beta with regards to markets and they have a higher sensitivity to earnings.

Any interesting themes for the 1-3 years or multi-bagger ideas?

Speciality chemicals have a big opportunity to shift production and supply chains to India. This theme has been playing out for some time now but it can accelerate now. So stocks in Specialty chemicals like Aarti Industries, Vinati Organics and Atul Limited could be multibaggers in the next three years. The formalisation of sectors continues to play out in the paints and jeweller sectors. Whether stocks in these spaces will be a multi-baggers is difficult to say, but one can expect at least 15 per cent compounded growth in the next three years. Mid-cap banks with quality management, and the ones which have navigated well through the crisis period of last 1-2 years can be looked at. Likewise in retail, companies like Trent and ABFRL (Aditya Birla Fashion & Retail) can deliver good returns.

Will FII flows continue to be negative?

FII flows are very difficult to predict as a lot of it is call or ETF driven. Active fund flows are predictable. Holistically, in the near-term, FII flows could continue to be negative as they are withdrawing from emerging markets such as India. So, it’s a risk off trade. Having said that, FII flows can come in very faster once things stabilise, but it will first flow in developed markets and then into emerging markets.

How will you play the debt markets?

We see the 10-year g-sec yield around 6.3 per cent, and probably it can even come down a little. It is going to be risk off for the next one year or so. The market is more likely to expand with quality franchises being able to access more funds.