Prashant Jain expects sharp recovery in Nifty earnings

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On valuations, Jain believes India’s market cap-to-GDP is a better parameter than the traditional price to earnings ratio as profits are not normal.
MUMBAI: Prashant Jain, CIO of HDFC Asset Management Company, expects a sharp bounce back in Nifty earnings in the next few years as corporate banks recover and new badloan creation falls. After four years of weak corporate profitability, where Nifty earnings growth was 3 per cent, Jain expects the Nifty EPS growth in next few years to be in mid- to high-teens.

Jain, who manages Rs 75,000 crore of assets in four of his open ended schemes, is overweight corporate banks, especially liability rich banks. He believes they have a good deposit franchise and are more sustainable than wholesale funded entities. Due to asset quality pain, some of the largest banks were available at attractive valuations leading to his overweight stance.
Jain also believes that utilities, a sector which has been the biggest underperformer in last 10 years with companies trading at low valuations, will turn around. It is a low-risk business and India’s power demand will grow rapidly as the drive to connect every Indian household gathers pace.

The fund manager is underweight consumer sector as he believes growth rates do not justify rich multiples. Jain advises investors to be overweight large-caps and allocate two-thirds of their portfolios to largecap/multi-cap funds and the balance one-third to mid/small-cap funds. “Over the last few years, sectors like metals, corporate banks, capital goods were suffering due to weak capex and high NPAs, due to which Nifty EPS growth fell sharply. Smallcaps which did not face this problem outperformed large-caps. More money flew in, which led to further outperformance,” says Jain. He believes that that phase is nearing an end.

He is not worried about the impact of elections on equity markets. “If you look at the data from 1979, in every single financial year in which elections took place, markets have given positive returns.”

On valuations, Jain believes India’s market cap-to-GDP is a better parameter than the traditional price to earnings ratio as profits are not normal. He believes that the trailing PE ratio does not show undervaluation as certain large business gave below-normal profits. The market-cap to GDP is almost close to what it was at the bottom of the Lehman crisis at 56-57 per cent, signifying attractive valuations. In 2007, when the Sensex had peaked it had gone up to as high as 130-140 per cent.

He added the bankruptcy code, an important reform, is working well and he expects further resolutions over the next two quarters. With NPA provisioning of large banks down sharply, profitability will come to normal which will result in a healthy EPS growth.
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