Midcap and smallcap valuations today are much better placed than largecaps, says Shibani Sircar Kurian, SVP & Head-Equity Research.

What is your view on some of these NBFCs? Markets are clearly voting for just one or two names.
In the NBFC sector, what has clearly happened is one, of course, the economy itself has started to recover from the lows of March and April. So you have seen resumption of economic activity and that is something that is being factored in. Second is the data that is coming out in terms of collection trends where month on month you are seeing improvement in terms of collections. Here I must add that we are nowhere near the normalised levels of either growth or collections but the recovery from the bottom has been slightly faster than what was earlier anticipated.

If over the next few months the collection efficiencies continue to improve and you get back to a normalised level of growth and collection efficiency sometime around October-November, then for next year, a lot of the NBFCs which are the stronger placed ones with good balance sheet and parentage could be back on track in terms of earnings outlook.

However, it is important that the pace of recovery as well as collections continue over the next few months and in this respect, the NBFCs which have strong parentage and which are still able to borrow money in the market at fairly good rates are better placed. In the market, from a liquidity perspective, things have definitely improved from the lows that you saw in the month of March and April. However, lenders are still selective in terms of the NBFCs who they are lending to. Also you have seen some NBFCs come out and talk about raising capital. So that is also adding to the overall balance sheet strength.

One has to be selective. While there is an improvement in terms of economic activity as well as sentiment, remember part of this improvement in economic activity could just be pent-up demand plus some degree of normalisation. Therefore, one has to see whether the pace continues or not. Our view on NBFCs is that one has to remain selective. Look at NBFCs which have strong capital positions, good balance sheets and structural business models. Those with a strong parentage are clearly at an advantage at this point in time.

Markets have gone wrong four or five times in the last six-seven years predicting the earnings recovery. What convinces you that we are in for a strong recovery because the market’s history of predicting economic recovery has been terrible?
I agree with you. We have from an overall consensus perspective been clearly going wrong on earnings estimates for the last few years. If you look at this current year, most of the consensus numbers have been cut sharply and earnings estimates for this year show that there will be no growth for Nifty-50 companies this year. However, next year most of the consensus numbers are building in a sharp recovery from the low base of FY21. I would tend to agree with you that for this kind of sharp recovery things need to fall into place at least by October-November of this year and we need to get back to a normalised run rate post for you to actually see that sharp recovery in terms of earnings for FY22. Hence, there could be some degree of optimism that is definitely getting built into estimates for FY22 at this point in time albeit of a low base.

In this sort of an environment, what we have also seen is the polarisation of the markets that you saw pre-Covid and it was kind of narrowing just before Covid struck us. Once again the polarisation has been quite stark. We have seen that valuations between midcaps and largecaps again expanded and within the midcap segment, in terms of valuations ,there are pockets of opportunity from an 18-24 months basis where we believe that companies which have strong business models, strong balance sheets and cash flows who will be able to gain market share in their industries will actually see a valuation pick up.

Now from a risk-reward perspective, midcap and smallcap valuations today look much better placed than largecap valuations; of course, over a slightly longer period of time because for the midcap segment to perform, economic recovery and economic growth has to come back on track. So we will have to monitor month on month how fast we are heading back to a normalised run rate in terms of growth. Now while all the high frequency indicators are showing an improvement, remember the improvement is also bottom and part of the improvement could be pent-up demand.

If you look at data on say the Purchasing Managers’ Index for both manufacturing and services; while it is again off the lows of April, it is significantly below the 50 level which means that economic activity is still muted in the country and therefore for this momentum to actually sustain, you will have to see that normalisation happening quickly over the next few months.



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