Profit of Nifty companies can double over next 5 yrs: Jyotivardhan Jaipuria

Over the next five years, there will be a greater allocation of retail savings to equities - both directly and via mutual funds, portfolio management services, etc., says Valentis Advisors MD

The Indian benchmark indices have rallied around 5 per cent thus far in CY18. Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, tells Puneet Wadhwa that he expects India to continue outperforming other emerging markets (EMs). Edited excerpts:

How do you see Indian equities fare in comparison to global peers?

Indian markets are relatively better placed versus other EMs and their recent outperformance to other EMs is likely to continue. First, India is less vulnerable to a rise in US interest rates compared to many other EM economies. Second, current account deficit (and indeed fiscal deficit) is in a much better shape and nowhere close to stress levels unlike in 2013. Third, earnings in India look set to recover, which will partly offset India's relatively high valuations versus other EMs.

Are the trade war fears overdone?

From an Indian standpoint, the trade war is not going to pose a major challenge. India is a more domestic-oriented economy. Our share of overall global trade is less than 2 per cent. The immediate attention of the trade war is between US and china with the EU now getting dragged into it. However, the consequence of the trade war could be the end of "globalisation" with countries getting more insular and increasing protectionism through tariff and other barriers. This could hurt global growth, raise inflation and hence have an indirect impact on all countries including India.

Most experts now expect the Reserve Bank of India (RBI) to hike rates in August. What’s your view?

Let me make three points here. First, we are getting close to a peak in the inflation rate and global commodities, especially oil, which will lead to lower inflation in spite of the increase in minimum support price (MSP). Second, in spite of this view, we agree with the consensus that the RBI will probably hike rates. The sharp MSP hike coupled with volatility in the rupee and rising interest rates in the US provide limited room to the RBI. Third, bond yields have probably already discounted an RBI rate hike and are trading more than 150 basis point over the policy repo rate. Hence, bond yields are unlikely to rise significantly from these levels over the next six-nine months. 

What are your earnings estimates for FY19 and FY20? 

Earnings, so far, seem to have reinforced our view that corporate profits are reviving. We are starting a strong phase in corporate earnings, which could see the net profit of Nifty50 companies double over the next five years. We are looking at 15 per cent profit growth (Nifty50 companies) each, for FY19 and FY20. The two key drivers for earnings are going to be peaking of the provisioning cycle for banks and operating leverage playing out for corporate India. 

Over the past 10 years (since FY08), earnings have grown an aggregate of only 50 per cent after tripling in the five years from 2002-03 to 2007-08. With this low level of earnings growth, any risks to de-railing of our expectation of a strong earnings cycle will be more global than local. A sharp and sustained oil price increase or any major global crisis could disrupt economies globally as well as in India.

Do you see a pick-up in retail and foreign flows to the equity market going ahead?

Retail participation in equity markets is on a secular upswing. Over the next five years, there will be a greater allocation of retail savings to the equity markets — both directly and via mutual funds, portfolio management services (PMS), etc. However, there will be ups and downs in this trend.

Markets in 2017 were strong and gave positive returns month after month. With the recent volatility in equity markets, we could see a near-term slowdown in equity flows though they will still be positive. Foreign institutional investors (FIIs) have been sellers in the market as EMs are out of favour and asset allocation is shifting to developed markets. We think EMs will be back in favour over the next six-nine months, as global growth outlook stabilises. Till then, we may see weak FII flows.

What is your outlook for the rupee and oil for the next six–12 months? Which sectors are you overweight on, going ahead?

Oil has seen a sharp rally and the trajectory is now flat to down. The bulk of the rupee depreciation is now behind us. The rupee depreciation has been positive in a sense since the stable rupee was eroding our global competitiveness. 

A big overweight for us that is not really consensus is the capital goods sector. We think there is the tremendous operating leverage that will play out in the sector as capacity utilisation increases year after year. The other overweight sectors include the financials and rural-oriented plays. We are still negative on telecoms. Though we like the consumer story in India, we are underweight on staples due to expensive valuations.

According to reports, nearly Rs 14,000 worth of IPOs (initial public offers) are likely to hit the street over the next few weeks. Is there enough appetite among retail investors for such a large float?

We think there is enough appetite for high quality companies in India. Overall we are seeing new sectors like insurance companies and asset management companies getting listed, which are increasing the breadth of sectors one can play the "financialisation" of savings.