A $6 Billion Manager Says India Equities Rally has Room to Run

Updated on
  • Nifty earnings to rise 19% next fiscal, Birla Sun’s Patil Says
  • Expect ‘low teen’ Nifty returns this year as growth returns
Photographer: Dhiraj Singh/Bloomberg

One of Asia’s best-performing stock markets in 2017 is not done yet.

A gauge of India’s top 50 companies is set for “low teen returns” this year, boosted by a revival in company earnings, economic growth and renewed interest from local and global funds, according to the nation’s fourth-largest money manager. The climb, should it happen, would be the index’s first back-to-back double-digit annual advance in eight years.

“It was a good 2017 in term of returns, but India has lagged behind global rivals on earnings and the economic growth front because of the impact of reforms,” said Mahesh Patil, who directly manages $6.3 billion in equities at Aditya Birla Sun Life AMC Ltd. in Mumbai. “The pain of reforms is behind us, and slowly growth will start improving.”

Domestic and overseas funds pumped a record $26 billion into Indian equities last year as a slew of reforms including implementing a nationwide sales tax and a funding plan for state-run lenders prompted Moody’s Investors Service to boost the nation’s rating to the highest since 1988. That helped the NSE Nifty 50 Index post multiple records and sent the rupee to its first annual gain in seven years.

Nifty Earnings Growth

Steepest annual rise in nine years estimated in FY19

Source: Data compiled by Bloomberg

The gush of liquidity also helped the $2.3 trillion market brush off concerns about how the new tax -- introduced months after the government’s disruptive cash ban in late 2016 -- weakened demand and delayed a recovery in company profits. India last week forecast its economy will grow this fiscal year at the slowest pace since Prime Minister Narendra Modi came to power in 2014.

Patil expects Nifty company earnings to rise an average 19 percent in the year starting April 1, as businesses have adjusted to the policy changes. Provisions for soured corporate loans at banks will reduce as the bad-loan cycle “peaks out,” and earnings at telecom firms and drugmakers will drive the index’s profit growth, he said.

His forecast compares with an average earnings growth estimate of 25 percent for the same period, data compiled by Bloomberg show.

Record Domestic Flows

India equity funds are flush with inflows this FY

Source: Association of Mutual Funds in India

With bank deposit rates at multi-decade lows and the government scrutinizing property and gold investments closely to deter speculators, individuals will continue to invest in equity mutual funds, Patil said. Global funds have bought a net $312 million of shares in the first week of the new year, after investing $8 billion in 2017.

“Foreign flows, which were tepid in 2017, will turn favorable as economic growth returns and both these will continue to keep the market buoyant and valuations high,” he said. His Frontline Equity Fund, with $3 billion in assets, has returned 17 percent annually in the past five years, beating 84 percent of its peers, data compiled by Bloomberg show.

Aditya Birla Sun Life had about $35 billion in stock and bond funds at the end of September. Here are some highlights from Patil’s interview:

  • Investors will focus on the fiscal deficit as high oil prices and less-than-estimated collections from GST may “put pressure” on the government even as it “tilts toward public spending” to boost growth.
  • The fund is bullish on companies that benefit from discretionary and rural consumption, which gain from the GST and the government’s focus to lift incomes in the villages; is positive on infrastructure, mainly companies in road, rail and urban construction.
  • Telecom stocks are “starting to turn positive after the pace of consolidation was faster than expected and as pricing pressure reduces.”
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