The Indian market may remain under pressure in the short term but the long-term outlook of the domestic market remains bright due to strong macros, the diminishing impact of Covid and various government initiatives. In an interview with MintGenie, Mitul Shah, Head of Research at Reliance Securities, share his views on the Indian market, currency and economy.
What is your medium-term view of the Indian market? Do you think that the extent of the global growth slowdown is fully factored into the domestic market?
We expect markets to remain volatile in the near term on account of deterioration in global macros and uncertainties prevailing in western economies due to high inflation.
We believe that in long term, India would see a multi-year economic upcycle led by strong macros, the diminishing impact of Covid, and various government initiatives in terms of schemes like PLI, localisation, and grey list for import of critical items, going forward.
However, in the near term and at the current level, the Indian market would see some pressure.
There has been so much noise over the decoupling of the Indian economy. Can the Indian economy remain in better shape even as some of the world's top economies like the US, UK and China witness a recession?
As I said earlier, we believe India would see a multi-year economic upcycle amid stronger macros, the minimal impact of Covid, the ‘China plus one' strategy, and various government initiatives.
Therefore, we believe in the India story and remain constructive on Indian equity despite high inflation and rising interest rates, while the US and the UK fear a recession.
We believe that any recession or slowdown in other major global economies would have a relatively lower impact on the Indian economy this time compared to the past few cycles due to better macros of the Indian economy and better export potential.
We would not consider it completely decoupling, but dependence on other economies is lower this time.
What is your view on the rupee? The domestic unit is at a historic low against the dollar. How does it affect investors? Can the rupee breach the 85 level in the next one year?
Indian currency remained relatively stronger than most other currencies in terms of depreciation against the USD.
The Indian rupee depreciated 11.3% year-to-date in the calendar year 2022 while the dollar index has appreciated 16% over the same period.
The depreciation of the rupee is less than all other currencies led by the strong macros of India.
This is also evidenced in significant FPI inflows in the last three months.
However, considering Fed’s rate hike and elevated inflation in the US, the dollar would further appreciate against most currencies.
Therefore, there is a high probability that the rupee may breach the 85 levels in the coming months.
Have Q2FY23 earnings been able to meet your expectations? Can we expect some earnings upgrade/downgrade?
The Q2FY23 earning season so far witnessed healthy revenue growth but higher inflationary pressure took a toll on margins and profitability.
We upgraded the ratings for 9% of total companies, downgraded ratings for 14% and maintained our ratings for 77% of total companies in Q2FY23 so far.
We increase earnings for 33% of companies while reducing earnings for 62% of companies and maintaining earnings for 5% of total coverage for FY23E.
For FY24E we reduced the earnings of 38% of companies, increased earnings for 52% of the coverage companies and maintained the earnings of 10% of companies.
In terms of target prices, we reduced the target prices for 41% of the covered companies and increased the target prices for 50% of the companies while maintaining the target prices for 9% under our coverage universe.
What sectors are you bullish on at this juncture? Please tell us why you think those sectors are to gain going ahead.
We believe that an all-around calibrated economic recovery is on the cards, though the timing remains highly uncertain.
Sectors like engineering, capital goods and electric vehicle (EV) ecology would continue to be in focus.
Financials would also continue enjoying positive traction with better credit growth and improvement in asset quality with lower NPAs.
The automobile is also another promising sector on the back of likely demand revival, better supply and commodity softening.
For healthy economic recovery, capex revival by the government and by corporates is a must now.
Capital Goods: India is at the cusp of capex revival, particularly in the capital goods sector. The government’s support through PLI and China +1 factors would further encourage manufacturing, going ahead.
The sectoral outlook appears to be promising from a mid-to-long-term perspective with huge opportunities coming from the various infra projects like the National Infrastructure Pipeline (NIP) with an estimated ₹111 lakh crore expenditure over the next five years and similar projects.
EV: We believe that the adoption of EVs would be a transformational change over the next decade, with an increasing focus on new EV launches by most original equipment manufacturers (OEMs).
Moreover, the entire value chain development and EV ecology would provide ample opportunities to the various associated industries in the EV space.
EV adoption is likely to be prominent in the two-wheeler segment followed by public mobility.
Automobile: Automobile is another promising sector as consumption spending-led demand revival would support volumes and profitability.
Infra spending and likely pick up in construction activities would support commercial vehicle sales, while ease on semiconductor supply, new product launches and healthy order book would aid passenger vehicle sales.
Financials: As the economy is on the path of revival and the impact of Covid on business is diminishing, we have seen improvement in the business performance of financial sectors across banks, NBFC and financial support services.
Moreover, during the interest rate upcycles this sector witnessed the expansion of net interest margins and improved profitability, which we expect to continue playing out in the next year also.
What is the road ahead for mid and smallcaps? Should we trim our exposure to mid and smallcaps and add more largecaps to our portfolios at this juncture?
We expect midcaps to outperform strongly over the next one year, but investors should pick quality midcap with the lower dent and high return on equity in the space of engineering, auto ancillaries, chemicals, etc.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.