Market valuations seem overextended; these sectors could be hit by localised lockdowns | INTERVIEW

Although domestic stock markets have corrected from their all-time highs, market valuations still seem to be overextended given the economic outlook.

Although domestic stock markets have corrected from their all-time highs, market valuations still seem to be overextended given the economic outlook, said Investment advisor Sandip Sabharwal in an interview with Surbhi Jain of Financial Express Online. He added that consensus earnings estimates are very high and could be tough to achieve. The market veteran added that the second wave of covid-19 is likely to impact the April to June quarter earnings of various sectors as states revisit imposing lockdowns. Here are the edited excerpts.

Amid the second COVID-19 wave, do you find market valuations reasonable? Is there any scope for further correction?

Market valuations seem overextended given the economic outlook, inflation dynamics and the very high earnings growth expectations that exist today. Earnings estimates across broking houses are 32-35% for the current financial year which is very tough to achieve and even with these expectations markets trade at 21X earnings. The impact of elevated expectations was seen last week in the results of Infosys and TCS which were subdued post results. Last year, the markets got support from unprecedented monetary and fiscal stimuli which are unlikely to be repeated especially given the fact the US is vaccinating very rapidly and their economy is bouncing back fast. The bounce back in the Chinese economy is also strong. As such we could see India underperform.

What do you make of corporate earnings by IT companies so far?

IT company earnings were fine. However, the risk is in earnings as margins are likely to be under pressure given wage hikes and lack of support from currency movements. The good part is that the business outlook continues to be strong for IT companies and that will prevent any significant decline in stock prices.

Do you think fresh localised restrictions including curfews and weekend lockdown to curb COVID will hit Apr-June quarter results?

Companies were facing unprecedented raw material price hikes even prior to the lockdowns and earnings growth outlook ex of the metals and commodity basket was looking shaky. The localised lockdowns are in a way a double whammy where margins are under pressure and on top of that sales are also likely to be impacted which will reduce the operating leverage which could have played out and helped the companies bypass some of the margin pressure. The impact on April to June earnings is likely to be real and significant especially in some pockets like consumer goods, automobiles, retail etc

In the past week, IT and Realty indices plunged up to 6 per cent, what’s weighing on these sectors?

Technology stocks corrected just because they had run up rapidly and most traders were overbought on the sector. Realty typically is high beta and whenever there is a sharp market correction then these stocks correct more. However, the outlook for real estate is not negative and the cycle has turned after many years and is likely to sustain.

What would be an appropriate strategy for Nifty Bank traders?

Nifty Bank traders should be cautious. The banking sector outlook which was improving could take a hit due to lockdowns and the impact on MSME’s and retail loans. The NPA picture might take more time to improve and that could be negative. On top of that inflation has picked up substantially which is typically negative for financials.

Indian rupee becomes Asia’s worst-performing currency in just two weeks, where is the rupee headed?

The INR outlook is more towards a depreciation cycle now as the interest rate differentials between India and the USA is not attractive given the growth and inflation outlook. In case the Indian Economic recovery lags that of the other Emerging Markets due to the second Covid wave we could see rupee underperformance continue.

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