scorecardresearchInterview: Economy on strong wicket despite challenges; positive on financials, pharma, infra: Dhiraj Relli of HDFC Sec

Interview: Economy on strong wicket despite challenges; positive on financials, pharma, infra: Dhiraj Relli of HDFC Sec

Updated: 27 Apr 2022, 04:50 PM IST
TL;DR.
  • Over the long term - we continue to repose our trust in India’s march towards a $5 trillion economy, says Relli.
Relli believes even though high energy prices are due to supply side disruptions, RBI will have to change its stance and increase rates in order to rein-in inflation expectations.

Relli believes even though high energy prices are due to supply side disruptions, RBI will have to change its stance and increase rates in order to rein-in inflation expectations.

India is likely to clock robust GDP growth for FY22 at 8.9 percent, one of the highest amongst large economies, said Dhiraj Relli, MD & CEO, HDFC Securities. In an interview with Nishant Kumar of Mint Genie, Relli explains why he is positive on financial, pharma, capital goods & infra sectors at this juncture.

Edited excerpts:

India's macro health looks subdued. Faltering GDP growth, widening trade deficit, and high inflation may drag the growth further lower. What is your view on the country's economy for the next 6 months to a year?

The third wave of the pandemic and geopolitical uncertainties on account of the Russia-Ukraine war has somewhat dampened enthusiasm for superlative economic growth. 

India’s Q3FY22 GDP growth slowed down to 5.4 percent from 8.5 percent witnessed in Q2 on account of the omicron variant. Higher energy costs are fueling inflation across the economic spectrum. 

Consumer inflation has surpassed the upper band of the RBI’s comfort zone and wholesale inflation running in double digits. We expect RBI to change its interest rate stance in its next policy meeting, and that will lead to a higher cost of funding for the economy.

Despite all odds, the Indian economy is on the strong wicket, as we have seen strong GST collections, higher e-way bill generation, all-time high direct tax collections, and healthy Purchasing Managers’ Index (PMI). All these data points suggest buoyant economic activity. 

India is likely to clock robust GDP growth for FY22 at 8.9 percent, one of the highest amongst large economies. 

If global growth conditions were to weaken further, it would impair India's exports and nascent capex cycle. 

Over the long term - we continue to repose our trust in India’s march towards a $5 trillion economy.

What is the biggest challenge for the market now, barring the ongoing Russia-China war? Is it the inflation, is it the rate hikes that could possibly happen?

High imported inflation is the biggest bugbear for India’s policymakers. The CPI is higher than the RBI tolerance level of 6 percent (wholesale inflation is still in double digits). 

The ongoing war between Russia-China has inflated prices across the commodities; especially crude oil. High energy costs leading to widening current account deficit are impacting India’s growth prospects. 

Though high energy prices are due to supply-side disruptions, RBI will have to change its stance and increase rates in order to rein in inflation expectations.

What is your view on the Indian IT sector? Accenture results show the demand environment is strong but could there be some pressure on the margins of IT players?

This year, the Indian IT sector has witnessed $30 billion of incremental revenues and an overall growth rate of 15.5 percent, the fastest growth rate since 2011. The industry has also set an ambitious target to touch $350 billion revenue by FY26 which implies a double-digit annual growth rate. 

Acceleration of digital transformation, adoption of the cloud solution, powering AI (Artificial Intelligence) capabilities, intelligent edge services, robotic automation, blockchain, could provide strong revenue visibility into diverse areas across BFSI, Engineering, Telecom and Automotive verticals. 

Recently, Accenture delivered stellar results in Q2FY22, reporting record order bookings in consulting and outsourcing and raising its revenue guidance. Accenture's positive commentary indicates a healthy pipeline and strong spending in areas of digital, cloud, Web 3.0 and security. 

Attrition in the Indian IT sector is at an all-time high. The supply-side constraints are forcing companies to offer above-trend salary hikes to retain talent. For example, TCS saw an attrition rate of 15.3 percent, while Infosys and Wipro’s numbers stood at 25.5 percent and 22.7 percent, respectively for the quarter ending December 2021. 

Higher employee costs are impacting the margins and we may see the same trend accentuating when companies announce their quarterly numbers in the next few weeks. 

Overall, we have a positive stance on the IT sector over the long run and investors should use any dip in stock prices in the next few months to accumulate large cap quality IT services stocks.

What sectors are you betting on in this market? Please explain your investment rationale.

Apart from the information technology sector discussed above, we feel financials, pharmaceuticals and capital goods sector stocks are set for outperformance.

Financials

The asset quality outlook is promising as the majority of the NPAs from the previous corporate cycle have been recognised and moved to the resolution phase. We expect lower slippages and higher resolutions and recoveries in the coming quarters. 

Economy has opened up gradually, which is evident from the strong growth in economic headline numbers. All these are presenting an improved scenario for credit growth. 

In the budget for FY23, the capital expenditure target for FY23 has been upped by 35.4 percent at 7.5 lakh crore. This hike in capital expenditure will boost economic growth and will create more jobs. 

These would have a rub-off impact on private investment and demand. The new CAPEX cycle will drive much-need credit growth in the banking and financial sector. We are sanguine on the prospects of the financial sector and consider the current correction as an opportunity to accumulate stocks for long term investors.

Pharmaceuticals

Over the past 5 years, the Indian Pharmaceutical Market (IPM) has grown at nearly 10 percent CAGR and has been one of the fastest-growing pharmaceutical markets in the world. India exported pharmaceuticals worth $24.5 billion in FY21. 

Going forward, this industry is expected to grow at 8-10 percent CAGR through 2020 to 2025. The pharmaceutical sector is poised to outperform led by strong growth in the domestic formulation business and healthy traction from international markets. It provides a good opportunity for investors as valuations have become attractive post recent correction. 

We believe that in the next 2-3 years there will be a strong growth trajectory for the pharma sector driven by (i) healthy growth momentum from the domestic market (ii) regulatory resolutions, (iii)moderating price erosion in the US generics market, and (iv) key complex product launches across generic and specialty categories.

Capital Goods & Infra

Green shoots for a strong revival in the investment cycle are clearly visible. 

First time in a decade, India is on the cusp of large capital expenditure on the back of expansion in manufacturing capacities ably supported by conducive government policies like PLI (production linked incentive) schemes. 

We expect capital goods and engineering companies to experience higher growth and this augurs well for stocks of capital goods producers and infrastructure contractors.

Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.

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First Published: 26 Mar 2022, 08:39 AM IST