‘Normalised earnings remain attractive for large caps’

By Ravi Samalad |  07-07-21 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

Large Cap Funds saw eight consecutive months of net outflows from June 2020 till January 2021 in the aftermath of the pandemic. In the last one year, this segment has seen net outflows to the tune of Rs 12,571 crore. Investors are coming back in large cap funds for the last three months, which is evident by Rs 1,985 crore net inflows from March 2021 till May 2021.

Over a one-year period, Large Cap Funds category has delivered 47.78% while the five-year returns stand at 13.86% as on July 6, 2021. 

Three fund managers share their outlook on large cap stocks and which sectors within this space are likely to emerge stronger from this pandemic. 

Sailesh Raj Bhan, CIO – Equity Investments, Nippon India Mutual Fund

Large cap segment of the market has seen a significant change in earnings expectations for the next 1-3 years. Profit shifts are material in the case of Metals, Domestic Cyclicals, Engineering and Capital Goods, IT services sectors, which had led to market rerating. Given that earnings in many of these segments are just starting off in a fresh growth cycle and overall Profit to GDP is recovering from low levels, large cap businesses on normalised earnings remain attractive. Sector like engineering industrials, cement and metals continue to remain attractive from a Growth-Valuations framework from a 1-3 year horizon.

Earnings acceleration has been strongest in years for large cap space where a large number of companies are beating expectations. Given the early start of cycle, normalised earnings growth is likely to beat nominal GDP growth for the near term. This reflects rising profitability from better capacity utilisation, new investment cycle, strong global growth, all of which impact large cap companies positively.

Sohini Andani, Fund Manager, SBI Mutual Fund

The automobile sector has been going through a lot of challenges in the last few years, e.g., 1) Cost increase due to transition to BS-VI, increased insurance costs, raw material price inflation, compliance with COVID protocols, partial shutdown of manufacturing facilities, etc., 2) Shortage in supply of key components, 3) growing trend of moving towards EVs and dampening of demand sentiments due to lockdowns.

While the companies are gearing to meet all these challenges, there is an expectation of demand revival due to huge pent-up demand and the need to have one’s own vehicle in the COVID environment as the economy opens up. Good and early start of monsoons augurs well for rural demand. All this is likely to result in decent volume growth for the sector. Revenue growth is likely to be better as the consumers upgrade to better vehicles post the regulatory changes. Also, as demand conditions normalise in the U.S. and Europe post significant coverage of vaccinations, both the vehicle exporters and auto-ancillary companies are expected to see growth revival over the next 6-12 months.

We expect the earnings growth for Nifty companies to be 22% CAGR between FY20-23. It is contributed by both the top-line growth, margin expansion and lower corporate taxation. The earnings revival is led by financials, metals, cement, pharma, IT and consumer discretionary sectors.

Gaurav Misra, Co-Head, Equity, Mirae Asset Mutual Fund 

I have a reasonably strong growth outlook for large-cap earnings. This will be driven by a revival in banking, auto and telecom earnings. Secular growth sectors such as pharma, consumers and IT are expected to deliver steady earnings.  Near-term tailwind to earnings will come from the commodity sector. Overall, I expect the next few years of earnings growth to be better than what has been delivered in the prior years for the large cap space.

I expect most well-led companies to emerge better. Good management would have used the pandemic to strengthen and reposition businesses. There will be faster adoption of technology which could lead to superior revenue, cost and market share outcomes. I expect leading banks/financial services, insurance firms, IT firms, platform-based businesses, pharma/specialty and telecom sectors to do well. The pandemic caused disruption, albeit short-term, to consumer discretionary firms. I also expect an eventual revival in the auto sector to benefit firms in that space.

Our Large Cap Fund will focus on structural opportunities across financial services, insurance, consumer discretionary and otherwise. The fund will also be adequately represented through India's competitive advantage sectors such as IT, healthcare and specialty chemicals. The fund will look to reinforce holdings in upcoming platform-based opportunities as well as stocks and sectors which come under special situations/deep value. At the individual company level, we select strong business models run by good management.

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