‘Mid and small-caps are likely to outperform in FY22’

‘It is critical that the Covid curve does not have a fat tail and the chain is broken quickly.’

If Covid cases reduce at a faster pace and lockdowns are restricted to Q1, the markets will do well, says B Gopkumar, MD & CEO, Axis Securities.

During an interview, he tells Ashley Coutinho/Business Standard that large companies in the financial space will gain market share and manage their books better.

What are the biggest risks for the Indian equity market this year?

The biggest risk for the Indian market will remain the Covid curve.

The tail of the curve will be important, along with the pace of vaccination.

The Indian economy had seen a good revival, as could be observed from the previous quarter results.

However, the second wave and the ensuing lockdowns have posed a major challenge to the economy.

If the Covid cases reduce at a faster pace and lockdowns are restricted to Q1, the equity markets will do fine.

If lockdowns continue even in Q2, the impact on the economy will be severe.

Thus, it is critical that the Covid curve does not have a fat tail and the chain is broken quickly.

What is your take on current valuations?

Valuations are a function of earnings growth, as well as resilience.

FY21 demonstrated the resilience of Indian firms and growth prospects improved by Q4FY21.

At this juncture, barring short-term challenges, growth prospects look attractive.

Thus, the current Nifty valuation at 20x one-year forward earnings in conjunction with an 18 per cent earnings CAGR over FY21-24 looks attractive.

Do you see the outperformance of the broader markets continue?

Mid-caps and small-caps underperformed from the beginning of 2018 until the end of 2019.

Mid-caps and small-caps came out of a long phase of underperformance in 2020.

Also, as FY22 will be a year of earnings revival, mid and small-caps are likely to outperform as they have better growth prospects.

Moreover, we are also seeing that market volatility remains range-bound which is good for small- and mid-caps.

All these factors point towards a good year for small- and mid-cap stocks.

Which sectors are you betting on in the coming months?

Auto, consumer discretionary, and retail NBFCs are likely to underperform because of challenges in demand.

The auto sector has margin challenges because of input cost pressures, while BFSI will beat the retail brunt of lockdown challenges.

Moreover, small banks are likely to remain significant laggards because of the new lockdown challenges.

However, a number of sectors like IT, pharma, metals, infra and industrials, could still outperform as they will see very limited impact from lockdowns.

What’s your take on banking and NBFC stocks?

There is immense polarisation in the BFSI space.

Large companies will gain market share and manage their books better.

So, there will be challenges for retail oriented smaller banks or NBFCs.

They are not out of the woods yet and negative surprises are likely.

Domestic brokers benefited from a steady rise in trading activity and the surge in retail participation last financial year. What are the key trends that you see emerging in FY22 for the industry?

The penetration of active broking accounts, as it stands today, is almost 4 per cent compared to the overall population.

We do see a similar trend to continue in FY22.

These emerging trends are backed by factors like falling bank fixed deposits rates, wherein customers are turning to the equity markets, whether it is in the form of direct equity or through mutual funds.

Moreover, April 2021 marked a positive inflow of AUMs.

The surge in retail participation is also driven by easier on-boarding of customers and our ability to reach tier II and tier III markets, with the help of digital platforms.

Additionally, since the disposable surplus of customers is higher because of the work-from-home scenario, we do see people moving their surpluses to equity as an asset class.

Can you give us a sense of the impact of peak margins on trading volumes in the F&O and cash segments?

Peak margins have not impacted much due to volatility in the market, and we still find F&O volumes growing.

The full-blown implementation of peak margins will be effective from September 2021 onwards, after which we also need to see how the market volume will shape up on the F&O segment.

The cash segments are better placed.

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