The India story is intact as the country is poised to witness healthy economic growth. However, uncertainty on the global front can bring in intermittent volatility, says Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services. In an interview with MintGenie, Khemka said the market leadership is shifting from IT and metals to sectors like banking and auto.
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Should we expect a flat or healthy single-digit return from Nifty this year? Please let us know what you think about this market.
Equity markets over the last six months have been engulfed with multiple challenges. The biggest concern has been high inflation and to control that – central banks globally have taken an aggressive rate hike approach.
However, the oil prices and other commodity prices have plunged sharply from their peaks, which is providing some relief to the inflationary pressures. It seems that inflation is peaking out and the central banks may slow down their aggressive rate hikes going ahead.
Even the corporates have navigated the Q1 earnings better than expected, providing resilience to the market. Thus large earnings downgrade is unlikely.
Post recent correction, the valuations too have turned attractive, providing a good entry point for long-term investment.
The FIIs who have been big sellers continuously since Oct’21 turned marginal positive for the month of July (includes both primary and secondary market data) which is a big relief for the market. The various macroeconomic data continue to be healthy while the monsoon is progressing well.
Now with the festive season about to begin in a month or two, we believe the demand would revive as well. But, uncertainties still prevail to a certain extent on the global front which might bring intermittent volatility in the market.
Is there a possibility that the market may see a change in leadership in the next phase of the rally? What sectors may outperform in the next one-year timeframe?
Yes, we clearly see the market leadership shifting away from IT and metals towards sectors like banking and auto driven by strong earnings growth. Overall one can consider - auto, banking, FMCG and retail for the next one-year investment perspective.
Auto: After witnessing major headwinds over the last three years, visible signs of a recovery are seen in the auto sector. There is a volume recovery across segments (except tractors and two-wheelers), with softening raw material costs aiding company margins from the second half of FY23 onwards.
Banking: The traction in loan growth has been strong, led by a healthy pickup in the corporate segment, while the retail and SME segment continue to remain strong. On the asset quality front, slippages are likely to be controlled, which will keep credit costs benign.
FMCG: The sharp decline in oil prices along with various other commodities is positive for domestic FMCG companies which have underperformed in the last two-three years.
Retail: The retail sector is a strong play on the re-opening theme after the lifting of Covid-related lockdown restrictions. We believe the sector is in a sweet spot for rapid growth over the next 5-10 years in India. Many companies have chalked out aggressive store expansion plans over the next few years.
Many experts and analysts say India's long-term story remains intact. Do you agree with this? What are the factors that make you keep faith in India's story for the long term?
Yes, we believe that the long-term story remains intact and what we are currently undergoing in the market are just short-term corrections. Equity market returns tend to mirror earnings growth in the long run.
Nifty delivered a 10% CAGR return over FY97-20 reflecting 8% earnings growth. Over FY20-FY22, earnings grew at 25% CAGR which led to 43% CAGR in Nifty returns.
Going ahead, earnings are expected to grow at 17% CAGR over FY22-24E. This is following strong GDP growth expectations for India.
RBI has pegged the growth at 7.2%/6.3% for FY23/FY24, while IMF forecast 7.4%/6.1% growth making India one of the fastest growing economies in the world. The higher growth reflects the government’s pro-reform strategies.
The government has been focusing on sustaining economic growth through spending across the infra ecosystem. This can broad base the growth momentum in the economy and revive the private capex cycle as well.
Further, in the current volatile global environment, India’s domestic consumption has remained resilient and provides much-needed support to overall economic growth.
What is your outlook for the Indian IT firms? What may be the impact of the US recession on the Indian IT players?
Indian IT firms are facing the headwinds of wage hikes and continued supply-side pressure as attrition is still elevated.
However, with valuations correcting meaningfully over the last six months, we remain positive on the IT Services sector due to a favourable medium to long-term demand outlook, on the back of resilient demand for IT Services, despite weakness in the macro-economic environment.
The order book remains strong on the back of Digital and Cloud transformation deals. Strong order book and robust employee additions suggest continued growth.
Higher fresher addition and lower sub-contractor expenses should offset the margin headwinds on account of higher employee costs, travel coming back, and visa costs. However, if the US enters into a recession, the order inflow may be impacted to a certain extent leading to subdued growth for a longer period.
How do you see the recent outperformance of the auto sector? What has given the boost to the sector when inflation is high and economic growth is limping? Can the sector sustain the gains?
The auto sector was facing various headwinds for the last two-three years, which led to huge underperformance. But now Auto demand is reviving, especially in the passenger vehicle (PV) and commercial vehicle (CV) segment, as reflected in the surging order book of original equipment manufacturers (OEMs).
The recent outperformance has been led by improved visibility in semiconductor supply, a ramp-up in production, demand recovery supported by a favourable product lifecycle as well as the continued shift to personal mobility. Healthy progress on the monsoons, which is now at surplus compared to deficient in Jun’22, is also likely to result in rural demand revival.
Further, the various commodity prices which had spiked up on account of record high inflation, have cooled down substantially, which along with price hikes, should result in improvement in margins going forward. We estimate a 13.5% PV industry volume CAGR over FY22-25E. A further shift from fossil fuels to electric vehicles would also aid growth in coming years.
Disclaimer: The views expressed here are those of the analyst and not of MintGenie.
