Investors can expect returns of 8-9% from Nifty this year: Mahesh Patil (2024)

Investors should expect high singledigit returns of 8-9 per cent from Nifty this year, said Mahesh Patil, chief investment officer, equity, Aditya Birla Sun Life Mutual Fund. In an interview with Prashant Mahesh, Patil said he has turned bullish on telecom and pharma recently. Edited excerpts:

In 2019, most of the Nifty returns came from a handful of stocks. Will it change this year?Corporate profits are showing signs of bottoming out. A gradual recovery in economy should lead to higher topline growth. Raw material prices have fallen 5-30 per cent in the last 12 months, helping gross margins and bottomline. We expect the Nifty earnings growth to rise by 21 per cent in FY21, largely driven by corporate banks.

Investors should expect high single digit returns of 8-9 per cent from Nifty this year. Investor expectations should be moderate as Nifty has moved ahead in anticipation of an earnings recovery. While the economy catches up, there will be a period of consolidation. On the other hand, mid and smallcaps had underperformed as there was risk aversion due to the NBFC crisis.

However, as the economy recovers, earnings growth of mid and smallcap companies should pick up as they have a higher linkage to the domestic economy. Largecaps will continue to do well, mid and smallcap companies could catch up and their relative underperformance could reverse. It is a good time to make some allocation to mid and smallcap segment over a period of time.

What are the risks for the equity markets in the coming year?On the global front, geopolitical risks continue to exist, and if oil prices go up significantly, say $80, our fiscal deficit will be under pressure. The US presidential election in November 2020, and an unexpected escalation of trade war leading to slowdown in China, can impact other economies also. On the domestic front, fiscal side is still challenging. If growth does not revive, the economy could be at risk. While bank balance sheets are getting repaired and banks are coming out of the NPA cycle, there is some pressure building up on banks from the mid corporates and retail side. There is some pressure from SMEs, which has not been classified as NPAs yet. If that gets converted into NPAs, it could pull down recovery.

Are problems in the NBFC sector behind us?A number of NBFCs, where there were concerns over solvency, have improved their funding profile and accessed funding away from the bond markets. Many have, additionally, raised equity or reduced their books on wholesale assets, thus improving equity capitalisation and loss-absorbing buffers. In addition, the government's measures for NBFCs such as reduced risk weightages should help. The NBFC issue does not seem to be a systemic issue, as of now.

What are the themes you like going ahead and why?Consumption is a theme we like. We see a continuous shift from unorganised to organised sector. Discretionary consumption will increase due to low penetration, improving affordability and increased electrification. In banking and financials, we like select private, corporate banks and insurance companies. Private banks will benefit due to increased market share based on comfortable capitalisation, better asset quality and healthy liability franchise. Some corporate banks will benefit due to NPL resolution, increased recoveries and capital infusion. Insurance companies shall see high growth, driven by low penetration and increasing financialisation of savings. We are also bullish on cement as affordable housing, a pick-up in real estate and an infra push of $1.4 trillion over the next 5 years augurs well for the sector.

We have also got bullish on pharma and telecom recently. Domestic pharma is doing well; there is good cash flow and high RoE. There are many large Indian companies with US exposure on the generic side and the pricing pressure has eased. The decline in US sales has bottomed out and companies that have invested in R&D in complex generics will see good times. In telecom, we see price cuts have bottomed out. With the government supporting the sector, a bottom has been created. There is room for Arpus to improve from here, and we see it improving over next 2-3 years structurally. With tariff increasing, capex intensity will go down and free cash flow will improve and debt will come down.

What kind of equity allocation should investors go with?Investors could allocate about 25 per cent to largecaps, 35 per cent to multicap funds, 20 per cent to midcap funds and 20 per cent to thematic funds like pharma, banking or MNC. Investors, who are seeking lower volatility, could go for a dynamic asset allocation fund or a balanced fund.

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