Exide Life Insurance CIO Shyamsunder Bhat says telecom sector has a lot of potential, rise in consumption to fuel growth

The 2-year moratorium on the deferred spectrum dues does provide some breather for the telecom sector, however, there would be more relief which is needed for the sector. The further movement could, therefore, be stock-specific, within the sector, depending upon the presence or absence, of these further measures.

Firstly, there is no “waiver” of spectrum dues. The moratorium was generally being expected so that has not come as a positive surprise, but the fact that they will now be required to give a bank guarantee could create pressure for some of the companies. Further, there would be an imposition of interest on the two-year moratorium, meaning higher payments by the telcos in the future. There has been no announcement yet in terms of some relief on the AGR dues, and this could be the reason for the initial negative reaction, apart from the fact that these stocks have already seen a sharp rally.

In a country like ours which is continuing to witness a rapid increase in consumption of mobile usage as well as data, the sector could continue to grow, however the stretched balance sheets, as well as large impending payment liabilities, also means that one cannot rule out a further consolidation in the sector, over the next couple of years. The bigger positive development is the bottoming out of the pricing scenario: we are witnessing price hikes in the sector, which is a longer-term structural positive.

The record highs for the Nifty-50 are building some optimism around an economic recovery particularly in FY20-21, as the low figures reported in the first half of FY19-20 would lead to a low figure for the full year, even if there is a recovery in the second half of the year.

The Nifty-50 level is not be giving a true indication of where the broad market actually is (a small subset of the Nifty-50 has fared very well over the past year, driving the Nifty-50 to present levels). For a further P-E re-rating of the Nifty, we would need to see higher Government spending on areas that could boost demand, as well as a revival in consumer spending, the trigger for which could be a cut in personal income tax rates.

An improvement on the domestic demand front, successful privatisation of large profitable companies, cut in personal income tax rates(especially for the mid-income group), any relief in the prolonged US-China trade war, remedial measures to ease the pain in the real estate/NBFC sector and the materialisation of higher FDI investments in new manufacturing facilities - these could be the triggers that could help the economy, the sentiment (and the Nifty-50!) to extend its rally next year.

If some of the above-mentioned monitorables do materialize, we should be witnessing a broadening of the market breadth going forward, and therefore a relatively higher upside from some of the large caps outside of the Nifty-50 index, and some of the quality midcap stocks as well.

The Nifty-50 by itself is now at 17xFY2021 earnings, which makes it (in isolation) fairly valued, and could lead to some consolidation. Recent gains have arisen thanks mainly to the cut in corporate taxes, as well as a spate of other Government measures.

There have been weak numbers for the GDP growth, and there are concerns due to lower collections on the GST front and lower revenues on the corporate taxation front, which is expected to lead to an increased level of Government borrowings and therefore, a possible slippage on the fiscal deficit front. So credit rating agencies might be viewing the slowdown to be more long-term and structural.

Some of the measures announced by the government would yield results but in the longer-term. There could be more measures required to revive the economy in the near-term. Yes, it could mean an increased pressure in terms of fiscal deficit, but that may be already being factored in the recent downgrade of the outlook.

Despite all this, India continues to be among the fastest-growing large economies globally. We do not see the recent outlook downgrade to trigger any panic selling. It could have some role in terms of international borrowings. However, the positive high real interest rates in India, as well as negative yields in many other economies, would lead to investor interest remaining high, on the bond-front as well.

The market has partly built-in expectations on a cut in personal income taxation in the forthcoming Budget. Consumption trends depend not just on affordability, but also on sentiment. A cut in personal tax, however small or symbolic, will play a big role in improving the sentiment of the consumer, resulting in increased spending.

From the equity market perspective, the introduction of allowance of indexation for long-term capital tax gains on equities could be a measure that would improve investor sentiment, as well as incentivize long-term equity-investing.

Over the past 1-2 years, investors have been generally risk-averse, and this has led to a crowding of investments into the stocks/sectors perceived to be “safe”, of which the consumer sector is one. We too were overweight on the consumer sector, but have cut our weight, purely on valuation considerations.

Thanks to our demographics, the consumption sector is likely to play an important role for a long time to come, and therefore investors may need to have this sector as a part of their portfolio, but investors need not be overweight on the sector at present valuations.

As and when the market breadth increases, more sectors, and stocks start participating in the market uptrend. We think there would be a portfolio shift happening from the consumer sector into some of the other sectors: as we already see some interest in auto and pharma sectors.

We are underweight on power utilities, media, and metals sectors.  However, there appear to be some signs of a bottoming out for the metals sector presently.

Yes, there are a handful of stocks within the midcap consumer space where valuations are not as rich as some of the large-cap ones in the sector. Some of the valuation discount for these stocks could be due to either dependence on a single product, greater dependence on the rural market, etc.  Upside potential does exist in some of these, yes, but these factors need to be kept in perspective. We also see potential in select consumer durable stocks, relative to FMCG stocks.

PSU banks have been long-term underperformers in terms of their stock prices, particularly relative to private sector banks. However, some of the recent newsflow in terms of a temporary breather for telecom companies, and the clarity on the NCLT resolution framework post the recent Supreme Court decision has led to some interest in PSU banks. A quicker resolution of some of the larger NCLT cases henceforth, and higher recoveries could possibly help in a re-rating of some of the PSU banks.

We could be in a “waiting period” from now till the Budget. We need to see how the measures by the government will translate into actual recovery and rise in demand. The structural preference for financial assets vs physical assets should continue to drive inflows. But in the past 5 years, we witnessed that even large-cap equity benchmarks delivered lower returns than bond benchmarks. This makes the case stronger for higher returns from equities over the next 5 years, particularly in light of the resumption of corporate earnings growth which was missing for the past few years. The initial trigger has already been provided by the cut in corporate tax rates.