INSUBCONTINENT EXCLUSIVE:
MUMBAI: Prashant Jain, CIO of HDFC Asset Management Company, expects a sharp bounce back in Nifty earnings in the next few years as
corporate banks recover and new badloan creation falls
After four years of weak corporate profitability, where Nifty earnings growth was 3 per cent, Jain expects the Nifty EPS growth in next few
years to be in mid- to high-teens.
Jain, who manages Rs 75,000 crore of assets in four of his open ended schemes, is overweight corporate
banks, especially liability rich banks
He believes they have a good deposit franchise and are more sustainable than wholesale funded entities
Due to asset quality pain, some of the largest banks were available at attractive valuations leading to his overweight stance.
Jain also
believes that utilities, a sector which has been the biggest underperformer in last 10 years with companies trading at low valuations, will
It is a low-risk business and India’s power demand will grow rapidly as the drive to connect every Indian household gathers pace.
The fund
manager is underweight consumer sector as he believes growth rates do not justify rich multiples
Jain advises investors to be overweight large-caps and allocate two-thirds of their portfolios to largecap/multi-cap funds and the balance
one-third to mid/small-cap funds
“Over the last few years, sectors like metals, corporate banks, capital goods were suffering due to weak capex and high NPAs, due to which
Nifty EPS growth fell sharply
Smallcaps which did not face this problem outperformed large-caps
More money flew in, which led to further outperformance,” says Jain
He believes that that phase is nearing an end.
He is not worried about the impact of elections on equity markets
“If you look at the data from 1979, in every single financial year in which elections took place, markets have given positive
returns.”
On valuations, Jain believes India’s market cap-to-GDP is a better parameter than the traditional price to earnings ratio as
He believes that the trailing PE ratio does not show undervaluation as certain large business gave below-normal profits
The market-cap to GDP is almost close to what it was at the bottom of the Lehman crisis at 56-57 per cent, signifying attractive valuations
In 2007, when the Sensex had peaked it had gone up to as high as 130-140 per cent.
He added the bankruptcy code, an important reform, is
working well and he expects further resolutions over the next two quarters
With NPA provisioning of large banks down sharply, profitability will come to normal which will result in a healthy EPS growth.
