The consensus street expectation is 22% CAGR for Nifty earnings between FY20 and FY24.
The Indian equity markets are going through a phenomenal run and the mutual fund industry is seeing its golden phase. Riding the bull run, monthly inflow in systematic investment plans (SIPs) is just a small distance away from the magical figure of Rs 10,000 crore.
In this backdrop, Outlook Money spoke with Harshad Borawake, head of research, Mirae Asset Investment Managers (India) Private Limited. Borawake manages approximately $1 billion of funds across four funds—Mirae Asset Banking and Financial Services Fund, Mirae Asset Large Cap Fund, Mirae Asset Hybrid Equity Fund and Mirae Asset Equity Savings Fund.
Q) With Nifty’s trailing price-earnings multiple at 31 and price-to-book at 3.9, do you think the current valuations are justified?
Ans) Equity markets purely work on earnings growth. In the last few years, due to demonetization, implementation of the goods and service tax and the impact of COVID-19, corporate earnings have remained subdued in the range of 4-5%. But now the Indian economy is bouncing back, thanks to a low-interest rate regime, support from the global interest rate and resurgence of demand in China and Western countries, and good monsoon, among others. Indian corporates will show tremendous growth in earnings going forward, so the present valuation is justified.
Q) How much earnings growth is the street expecting?
Ans) The consensus estimate (from Nifty) is about 22% compounded annual growth rate (CAGR) between FY20 and FY24. I understand it looks pretty rosy, as the same figure between FY16 and FY20 was just 5.2%. But you need to understand that markets ignore the past and work on future expectations.
Q) From where will this mammoth 22% earnings growth come? Which sectors will play a role?
Ans) Banking and financials would play a lead role on the back of normalisation of the provisioning cycle. Bad days for banks are behind us. Maybe the growth of the banks’ loan book will remain subdued, but profits will come from reduce provisioning.
Metals have seen massive rerating. Metal as a sector is witnessing golden days. We have not seen such massive earnings growth in the past two decades. For example, Tata Steel has reduced it’s debt by Rs 30,000 crore in a single year. So metals will be a heavy-lifter for the index going forward.
Q) Tell me something about the funds that you are managing. How has been the inflow in these funds?
Ans) We are seeing a steady inflow in our funds and there was not a single month in recent times when the outflow was more than the inflow. The hybrid equity fund that I co-manage has assets under management (AUM) of Rs 6,000 crore, the AUM for the banking and financing services fund is Rs 750 crore and that for the equity saving funds is Rs 360 crore.
Q) What are the reasons for such massive inflow in Mutual funds and the equity market?
Ans) High inflow is a confluence of many factors like demographic change and changing investment psychology where youngsters start investing very early as compared to the previous generation. The low-interest rate has made fixed deposits a bit unattractive, so traditional savers are moving towards equities for inflation-beating returns. The stagnant real estate market has also played a big role in fund inflows as the affluent class is now moving towards equities. An effective marketing campaign by the mutual fund industry has also played a pivotal role in SIP inflows.
Q) Do you think India's growth story is intact despite low credit growth in the past few years?
Ans) Yes. It is very much intact.