Quality mid-, small-caps may continue to do well: Reliance Securities CEO

In a Q&A, Lav Chaturvedi says the market is still predicting that the impact of the second wave of Covid-19 cases will not be as severe as last year

Sectors that are beneficiaries of capex revival are likely to outperform in the medium to long term, Lav Chaturvedi, ED & CEO of Reliance Securities tells Ashley Coutinho in an interview. Edited excerpts:

The market has seen bouts of volatility in the last few days. What are the risks for the market this year?

While Indian economy started witnessing momentum after sharp fall in economic activities induced by the pandemic last year, a sharp rise in the second wave of Covid-19 cases and enhanced mobility restrictions imposed by several states have cast a shadow of recovery phase. Notably, the market is still predicting that the impact of the second wave of Covid-19 cases will not be as severe as last year. Any prolonged economic restrictions by large states beyond June 2021 and further spread of Covid-19 cases in hinterland areas, where the healthcare system is not up to the mark, can be the biggest risk to the domestic economy and equites.

What is your take on current valuations?

Nifty currently trades at 23 times one-year forward earnings, which is over 25 per cent premium of its long-term average. Further, on market cap to GDP parameter, India is trading above 100 per cent as of now mainly due to contraction in GDP last year. However, spread between government security yield and Nifty earnings yield is still at 110 basis points (bps), which is quite lower compared to long term average of 185 bps and therefore we believe equity class is expected to remain a preferred investment option.

How do you assess corporate earnings in Q4? 

Notwithstanding cost inflation, Q4FY21 earnings growth is expected to be strong considering the low base of last year and sharp demand recovery with improved capacity utilisations. While it is still premature to compare actual performance of Nifty 50 companies as only few companies of Nifty 50 declared their 4QFY21 performance till last week, profit of these companies recorded average growth of 25 per cent. In our view, higher capacity utilization can potentially negate sharp rise in input and freight costs to an extent. However, results of heavy weight financials / BFSIs are expected to be crucial for overall 4Q earnings growth of Nifty 50 companies given the recent order by the Supreme Court.    

Do you see the outperformance of broader markets to continue in the coming months?

Outperformance of midcaps and smallcaps was mainly on account of improved earnings visibility of corporate India. As valuations of largecaps appeared to be out of whack, investors started lapping up quality midcaps and smallcaps, which were available at relatively comfortable valuations. As we still believe that corporate earnings recovery is very much on the cards, quality midcaps and smallcaps should continue to do well in the medium to long term perspective.

Which sectors are you betting on in the coming months?

A low interest rate scenario in the last two years has certainly benefited rate-sensitive sectors. This has also aided the real estate market to see sharp volume increase in recent months. Additionally, strong pricing scenario and uptick in demand globally aided metal stocks. Further, announcement of sharp increase in capital expenditures in the Union Budget fueled rally in infrastructure, cement, industrials, and capital goods. We believe sectors, which are beneficiaries of capex revival, are likely to outperform in the medium term of long-term perspective.

What is your take on banking and NBFC stocks? Is the sector out of the woods yet or could there be negative surprises in store?

We believe prolonged mobility and economic restrictions in states can adversely impact the growth trajectory of Banks and NBFCs in the medium term. Sharp rise in daily caseload and wider economic restrictions by several states again have posed risks to the asset quality of unsecured personal/MFI/consumer durable and even MSME loans. We believe these state-wide lockdowns/night curfews to ease by May end. However, any such disruptions in economic activity always have a cascading effect in the subsequent months. This will impact both the credit growth and asset quality assumptions for the retail banking and NBFCs.

What are the key trends that you see emerging in FY22 for the broking industry?

Record increase in new clients on-boarding and robust average daily turnover (ADTO) have benefitted the broking industry during the last fiscal. Given the cyclical nature of broking business along with high base, market volatility and phased implementation of new margin regulations, one can expect some tapering-off in industry’s growth in FY22E. However, we still believe digital adoption and continued emphasis on improvising operating efficiencies can surprise all on margins front. In our view, industry is clearly shifting its focus from volumes to number of trades, which may prompt brokers to target more customers on-boarding and activation in the current fiscal.