Markets are now looking at FY23 earnings: Yogesh Patil of LIC MF Asset Mgt

In a Q&A, the head of equity at the fund shares his investment strategy and key takeaways from the June 2021 quarter results of India Inc

YOGESH PATIL, head of equity at LIC Mutual Fund Asset Management shares his views on the road ahead for equity markets, his investment strategy and key takeaways from the June 2021 quarter results of India Inc in an interview with Puneet Wadhwa. Edited excerpts:

Do you see any stress points for the markets given that they are already at record highs?

Markets are now looking towards fiscal 2022-23 (FY23) earnings. Corporate earnings for the September quarter may not have a significant impact on the broader equity market, though we may see stock-specific reactions. While the fear of the third wave remains, taking cues from the developed economies, that increased vaccination and lower hospitalisation rate is lower versus the second wave, could be seen as a positive.

What is the road ahead for flows into the equity segment – domestic and foreign – over the next few months?

Flows to the emerging markets (EMs) will be determined by trends in the overall global flows, interest rate cycle and potential return from specific assets as well as country. For India, the fundamentals may rank us on higher table as far as foreign flows league table is considered. Domestic flows into equities, I believe, will also continue on account of financialisation of savings, at least in the near term.

Your overweight and underweight sectors?

We remain positive on technology, private sector financials, gas, infrastructure, and export-oriented plays which may continue to see earnings upgrades. Remain underweight on sectors/companies where there are clear disruption risks, volatile earnings, low capital efficient business-like commodities, and leverage-heavy business.

What are your key takeaways from the June 2021 quarter results of India Inc?

While the quarter was marred by the sequential impact due to partial lockdowns/second wave in several states, the favourable base (significantly impacted by a stringent and extended national lockdown) helped drive revenue and profitability on a year-on-year basis. Commentaries across sectors are positive, and most management are taking confidence from the vaccination drive.

Firm commodity prices have been an issue. How is India Inc likely to deal with it over the next few months?

The sharp increase in commodity prices in short span is making life difficult for producers as they are unable to pass on the cost to the consumer in the near-term. However, once the commodity prices stabilise, we may see a large part of the cost getting passed on to consumers.

Can all this dent consumption?

Yes, in the short-term this may hurt consumption. In the long-term, however, the consumption story should remain intact as companies find better, cost effective alternative or reengineer products to reduce the overall impact. We have seen this happening in the auto sector, where metal body parts are now being replaced by toughened fiber body or strong plastic molds.

Scrappage policy, Ola's e-scooter launch etc – are these disruptions that the auto sector does not need at a time when it is already grappling with other headwinds?

Auto stocks have been an underperformer in the last one year due to: (a) the electrification trend picking pace, especially in case of two-wheelers; (b) semi-conductor shortage that has impacted production schedules of most companies; and (c) high inflationary environment, which has led to margin pressure. The launch of Ola e-scooter at disruptive pricing may have an impact on the ICE scooter segment. While it’s too early to call out the winners and losers here, we expect aggressive launches by incumbents over the next one-two years to retain their market dominance. With respect to the government’s scrappage policy, the incentives provided are attractive to lure customers to voluntarily scrap their vehicles.