In Conversation With,Anoop Bhaskar Head (Equity) IDFC Asset Management Company Limited

"Corporate-Focused Banks Should Sustain Improvement In Profits"

Anoop Bhaskar
Head (Equity) IDFC Asset Management Company Limited

"Corporate-Focused Banks Should Sustain Improvement In Profits"

With high levels of inflation expected to persist in the near future along with more potential rate hikes, what is your outlook on the Indian equity markets in the short to medium term?

After a strong move from April 2020 till December 2021, during CY 22, Nifty has largely been range-bound, up 2.5 per cent. In comparison, several global markets, led by the US, have dropped by almost 20.3 per cent. China is down 14.4 per cent and MSCI EM down 27.8 per cent (in local currency). Overlay this with the currency market and India’s performance underlines its exceptional nature. The rupee has depreciated by a shade under 10 per cent as compared to yen depreciating by 19 per cent. The UK pound was down 11 per cent and even the euro was down 9 per cent. The next layer would be valuations. While on an absolute level valuations at 19x (two-year forward) are not flashing red, on a relative basis the Indian valuations are trading at a record premium of 51 per cent to the MSCI EM index. 

Finally, China has embarked on a policy of economic control rather than economic growth. Being the largest component in MSCI EM, a continuous underperformance makes India’s steady performance even sharper on a relative basis. Hence, any outlook for India would need to incorporate the above variables while forecasting short to medium term. With commodity prices softening, the pressure on margins and profitability registered across a host of sectors has seen sharp downgrades in earnings. For stocks to register a reasonable positive return, earnings growth should return to a cycle of upgrades, as was witnessed from September 2020 till December 2021. We believe that from the March 2023 quarter such a cycle of upgrades may return. Hence, we remain positive on the market for 2-3 years outlook.
 

Which sectors according to you are well-placed for 2023?

Sectors where profitability was impacted by a sharp spurt in commodity such as power and fuel prices should benefit if the current trend of commodity prices softening sustains going forward. As a result, profitability could be impacted during 2023 in the case of consumer staples, durables, automobiles and cement. In addition, corporate-focused banks should sustain the improvement in profits due to lower provisioning – as corporate profitability will recover and level of leverage is at a low point as compared to CY 17-18 levels.
 

In your view, how has the Q2FY23 earnings season fared? What is your outlook on earnings for the next few quarters?

Earnings for Q2FY23 were muted on expected lines. The sharp jump in commodity and power and fuel prices caused by supply dislocation due to the Russia-Ukraine war would have impacted margins during the quarter. BSE 200 was at an aggregate level, sales increased by 28 per cent, EBIDTA fell by 8 per cent and PAT by 10 per cent for the quarter. However, excluding OMCs and metals, sales were up 25 per cent with EBIDTA growth of 11 per cent while PAT grew by 21 per cent. The star performer has been banks, especially PSU banks.
 

IDFC Sterling Value Fund has proved to be a star performer in the last one year. What has led to such an outperformance over its peers as well as its benchmark? Kindly throw some light on the fund’s investment philosophy.

In fact, IDFC Sterling Value has been an outperformer from April 2020 onwards. Its outperformance can be traced to its focus on cyclical sectors such as automobiles, logistics, IT services and PSU banks. The fund is positioned as a value fund focusing on sectors and companies which are cyclical in terms of their profitability growth. These sectors had been punished for erratic earnings during CY18 and CY19 while the same strategy has delivered outperformance since April 2020. The fund, currently, is balancing between companies and sectors where profitability is expected to register a strong rebound – cement, PSU banks and automobiles – with sectors and stocks where profit growth would be steady, such as corporate-focused private sector banks. Such a strategy, we hope, should reduce volatility of performance in time to come.
 

Over the span of your career thus far, what have been your key learnings from equity markets?

Earnings over valuations – that is an important factor in the equity markets. While valuation is an important and critical factor, one should balance this with earnings’ growth trajectory. The market is willing to pay premium to consistent earnings’ growth because investors should not overlook this aspect. As an investor, a portfolio spread across equity funds which target consistent profit generators and funds which focus on cyclical sectors would give them a truly balanced portfolio.