Foreign institutional investors (FIIs) are keenly watching the pace of covid-19 vaccination in India, Pratik Gupta, chief executive and co-head of Kotak Institutional Equities, said in an interview. A reversal of the foreign investment outflows will be contingent on how fast India manages to vaccinate its population, Gupta said, adding that FIIs will start buying local shares if the economy starts normalizing, given the relatively strong earnings growth outlook for local companies. Edited excerpts:
What makes Indian markets resilient when most states are under lockdowns and the vaccination process has slowed down?
This is not unique to India. Earlier, we had Brazil and France also rallying despite the pandemic. In India, the economic damage from localized lockdowns will not be as much as last year, and markets are forward-looking. The consensus is that the second wave will impact the June quarter earnings, but the recovery will be swift thereafter, and a sharp increase in vaccinations from July or August will reduce the risk of a third wave. Also, the Nifty has been supported by IT, pharma, metals and chemicals, which are not as impacted, while banks had made heavy provisions for bad loans. March quarter earnings have been largely in-line. Lastly, foreign selling has been mostly offset by domestic buying.
Besides covid and vaccine-related concerns, what are the key challenges for the Indian markets?
In the near-term, the risk would come from a delay in the vaccination ramp-up or if vaccines prove ineffective in preventing the third wave. A more fundamental longer-term risk could come from a faster-than-expected rise in global and domestic interest rates, which would impact all emerging markets, including India. Other risks to bear in mind are a rural slowdown, which may get worse if the monsoons disappoint, a spike in global oil prices, and any populist government action ahead of Uttar Pradesh elections next year.
Do you think India is losing its sheen among other emerging markets?
India’s second wave certainly had foreign investors worried about the near-term outlook, but most EM investors are also struggling with alternatives to China, which is about 40% of MSCI EM index and where the local tech giants are being seen as riskier than assumed earlier. Most global EM funds are still positive on India. For example, we continue to see good interest in Indian IPOs and QIPs. India’s structural drivers remain in place–a fast-growing economy with attractive demographics and an under-penetrated market for many industries, increasing financialization, productivity improvements from technology adoption and improving infrastructure. The start-up ecosystem is also achieving critical mass.
FIIs are dumping Indian stocks for the past two months. Will this trend reverse any time soon?
There is obviously concern about the near-term earnings impact from the pandemic and over how long it’ll take this time for a recovery to pan out. If we assume that the economy starts normalizing from July, we should see FII interest come back. The other main concern now is on the pace of vaccination rollout – so as this progresses, the confidence among FIIs will return. Most FIIs are also watching the government’s privatization efforts – if, say, Air India or Bharat Petroleum Corp. or IDBI Bank get completed.
Commodity inflation has eroded margins in Q4. Is that concerning?
It’s already priced to a large extent, Ebitda margin estimates have been cut for industries heavily impacted – such as autos, chemicals, paints, etc. The underlying strong volume recovery trend remains intact, so companies should be able to pass on some of the commodity price inflation. Any declines in gross margins are also being offset by higher volume growth, so that’s cushioning the impact at the Ebitda level in many cases.
If recovery takes a hit due to prolonged curbs, do you think India’s market valuation will be justified?
The Nifty currently trades at 21 times FY22 and 18 times FY23 price to earnings, which is not expensive given the strong growth outlook. Although there are sectors like consumer staples that appear overvalued – and steady deleveraging across many sectors like metals, real estate, cement, and power. Interest rates are also relatively low, and hence the gap between the earnings yield and bond yield looks reasonable at this stage.
What is your outlook on India?
The pandemic may have already peaked, much of the earnings impact is already priced in. So our long-term view is positive – use any dips to buy good quality businesses, especially among domestic cyclicals, which we think will outperform over the next 2-3 years. We think Indian equities will remain attractive in the prevailing low-interest-rate environment, so local inflows into equities should continue to recover.
Never miss a story! Stay connected and informed with Mint.
Download
our App Now!!
