Nimish Shah, Chief Investment Officer – listed investments at Waterfield Advisors
Covid affected sectors such as the travel, housing and hospitality industries could see some support from the government in Union Budget 2022, scheduled to be presented on February 1, says Nimish Shah, Chief Investment Officer – Listed investments, Waterfield Advisors. “Sectors that will prime the economy, like infrastructure, power and capital goods, could be in focus,” he told Moneycontrol, in an interview.
Commenting on December 2021 quarter (Q3FY22) results, Shah, who has close to 25 years’ experience in the capital markets across asset classes and platforms, says sectors such as Metals, Oil & Gas, Private Banks, IT, Speciality Chemicals and Life Insurance are likely to see double-digit revenue growth.
Edited excerpts from the interview follow:
Earnings season will be kicked off by IT companies and HDFC Bank this week. Do you expect a significant earnings upgrade?
One of the major risks for Q3 and Q4 FY22 earnings is inflation. Q2 saw input prices rise substantially. Manufacturers have largely been unable to pass on the price rise to consumers across industries. This could mean bottomline growth numbers could be impacted for many sectors.
However, this could be offset by other service sectors and thereby may not have a material downwards impact on earnings.
Upgrades, if any, would be stock-specific. A clearer picture should emerge by the first week of February, once major companies have declared results.
Which sectors are likely to report double-digit profit and revenue growth in Q3 on a year-on-year basis and which sectors will register negative profit growth in Q3 on a year-on-year basis?
For Q3FY22 YoY revenue growth, sectors like Metals, Oil & Gas, Private Sector Banks, IT, Speciality Chemicals, and Life Insurance are likely to see double-digit growth. On a PAT basis (for Q3FY22), Banks, Metals, IT, Oil & Gas, Logistics, and Retail sectors should report double-digit growth.
Infrastructure and its related sectors like Cement are likely to see a drag on profits. The Automobile and Auto Ancillary sectors have also seen a lot of stress on their top and bottom lines due to Covid and semiconductor shortages.
While the Budget itself will be a non-event, there are a few areas and sectors where there could be some support, clarifications and easing of regulations. Covid affected sectors like travel, housing and hospitality could see some support. Sectors that will prime the economy, like infrastructure, power and capital goods, could be in focus.
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Apart from expected policies on further PSU Bank consolidation and capitalisation, MSME support, and support to farming, the important aspect would be to see how inflation and interest rates are addressed. The Government’s fiscal targets and its view on how the two I’s will pan out during the year will also give direction to capital markets.
Initial numbers released by banks generated confidence among market participants in the last few days. Hence, is this the right time to add banking stocks in a portfolio or should one wait for the actual Q3 earnings?
Banks’ business outlook continues to improve as credit growth is picking up with the increase in economic activities. We estimate slippages to moderate sequentially, resulting in overall asset quality improvement — barring the mid-sized banks, which could see stable/marginal deterioration.
We expect most Affordable Housing and Vehicle Financiers to report a decent improvement in disbursement volumes in Q3FY22 sequentially. PSBs are likely to see continued traction in operating performance, aided by modest business growth and a gradual reduction in provisions.
The business outlook continues to improve, with credit growth picking up to around 7.3 percent as of December 17, 2021, led by an uptick in economic activity and the rising pace of vaccinations. Most sub-segments within Retail and SME are showing healthy signs of revival, surpassing pre-Covid levels, with strong demand in the Home, Vehicle, Tractor, and Small Business segments. On the other hand, the commercial vehicle (CV) and microfinance institution (MFI) businesses continue to trail normalised levels.
We have consistently been recommending adding selectively to the leading Private sector banks, which enjoy low NPA (non-performing asset) pressure and a low cost of funding. In Banking, the quality of management and its ability to ride out the vagaries of the market is of prime importance, and some of these banks are well poised to continue increasing market share.
Last week US 10-year bond yields spiked amid expectations of faster policy tightening and rate hikes in 2022. Do you think the US 10-year bond yields could cross the 2 percent mark soon?
The US 10-year G-Sec yield got pushed down to 0.53 percent in July 2020 as massive liquidity was pumped in to fight the first wave of Covid. This infusion and continuation of the easy monetary policy to support growth led to yields staying low for some time.
However, as inflation started to increase, the US Government announced taper plans and plans to raise rates over CY 2022 and 2023. The taper tantrum led rates to go up and they touched 1.81 percent last week before settling at 1.76 percent. Reaching the 2 percent mark may not be too far away.
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