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Tushar Pradhan, CIO, HSBC Global Asset Management (India).
Tushar Pradhan, CIO, HSBC Global Asset Management (India).

‘Earnings revival seen in FY22 may be uneven’

Key challenges include the slow rate of adoption of recent reforms announced in the agriculture and labour sectors, says Tushar Pradhan, CIO, HSBC Global Asset Management (India)

As hopes of demand revival gather steam led by festive buying and a well-distributed monsoon, Tushar Pradhan, chief investment officer, HSBC Global Asset Management (India) Ltd, expects Indian corporate earnings to witness a revival in the second half of FY22. However, in an interview, he said earnings recovery may not be uniform, and lower corporate tax rates will reflect in a positive demand scenario. Edited excerpts:

As the Indian market’s performance is mostly hinged on global factors, what is your outlook beyond FY21?

The linkages are likely to continue as the global pandemic gives rise to asset allocators to deploy in risk assets given low yields in fixed income markets. Our regional house view continues to favour equities on the back of such low yields globally. In India, the economic outlook is much worse than in developed markets. This is due to the disruption in supply and the impact of the pandemic on demand. However, hopes of demand revival post the onset of the festive season are reasons for renewed hope. We do expect a strong earnings recovery beyond FY21 driven by the base effect and genuine pent up demand reviving in the next financial year. One has to also remember that tax rates have been brought down substantially and that will reflect greatly in a positive demand scenario. We are hopeful of demand revival leading to strong earnings growth beyond FY21.

India has started outperforming emerging markets (EM). Will this last and, if so, for how long? What are the key factors global fund managers are considering before allocating money to Indian equities?

The key to continued outperformance vis-à-vis EMs will be sustained demand revival and foreign portfolio investment (FPI) inflows. Domestic investment sentiment remains subdued, however, we have seen the market sensitive to foreign inflows. The domestic nature of the economy, attractive demographics and global supply chain diversification are key factors that make India an attractive destination for international investors. However, India-dedicated funds have not seen much increase in recent years and most FPI flows have been on the back of allocations to India within a regional fund. Some of the allocators have indicated higher weightage to India in recent months.

Indian companies have used covid disruptions to prepare for the next growth cycle by cutting costs and raising capital. When do you see an earnings revival for India Inc?

We see earnings revival as soon as the second half of FY22. However, it is unlikely to be uniform. We have classified companies under three broad categories. Companies that are likely to “thrive" in the current market scenario are e-commerce, telecom, etc. Companies likely to “revive"are those which see cyclical demand factors leading a revival in growth across a broad range of industrial and manufacturing companies. And lastly, companies that are likely to merely “survive" are those most affected by the pandemic and the weakest of the lot. We feel earnings revival will continue to be uneven.

As aggregate demand in the economy was already weak before covid-19, when do you expect economic activities to rise to be beneficial to corporate and business growth?

Aggregate demand was seen to be weak following the sluggish growth in the broader economy. However, a well-distributed monsoon will be a much-needed boost for rural demand revival. The base effect will also benefit urban demand. The disruption in the economy, especially the informal sector will continue to drag on. However, this indicates a shift to organized players and the two-tier nature of the recovery will favour more organized players and the shift of market share will only accelerate. While this may be positive from a markets perspective the overall economy may take much longer to recover.

What are the key challenges for the markets to sustain rally?

Key challenges include the slow rate of adoption of recent reforms announced in the agriculture and labour sectors. Lack of overall demand and very weak private capex environment

How do you rate India’s valuations compared to other emerging markets?

Indian markets have always traded at a premium to other emerging markets. However, one cannot say that the Indian markets look particularly attractive vis-à-vis other EMs at this stage. But given the less globally integrated nature of our economy, the continued consumer discretionary under-penetration may justify the premium on valuation for long-term investors.

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