scorecardresearchInvestors should focus on large cap IT companies only, says Shrikant Chouhan of Kotak Securities

Investors should focus on large cap IT companies only, says Shrikant Chouhan of Kotak Securities

Updated: 07 May 2022, 10:27 AM IST
TL;DR.

  • The rate hike by the RBI is likely to directly impact small business and home loans, even as the overall rates gets expensive, says Chouhan.

Chouhan expects India’s GDP to grow by 8.9 percent in FY22E, 8.1 percent in FY23E and 6.5 percent in FY24E. Photo Credit: MintGenie

Chouhan expects India’s GDP to grow by 8.9 percent in FY22E, 8.1 percent in FY23E and 6.5 percent in FY24E. Photo Credit: MintGenie

The valuation of the IT sector is reasonable and the earning visibility is healthy. However, it remains sensitive to central banks' decisions and liquidity, said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities, in an interview with Nishant Kumar or MintGenie. He also said that growth stocks may continue to trade at rich valuations, but value stocks can have moderate re-rating.

Edited excerpts:

The Q4 earnings so far have been mixed and have failed to lift the mood of the market. How do you see the earnings of IT and financials? Will you recommend increasing exposure to these two sectors?

We believe the BFSI sector is well placed relatively, having a limited direct impact of the geopolitical concerns. 

Asset quality and credit cost improvement are positive. However, inflation, if increases further is a headwind. 

The rate hike by the RBI is likely to directly impact small businesses and home loans, even as the overall rates get expensive. 

We must monitor the demand for loans a couple of quarters down the line. 

The valuation of the sector is reasonable and the earning visibility is healthy. However, it remains sensitive to central banks' decisions and liquidity. 

We suggest buying strong franchises with lesser vulnerable customer segments for a medium to long-term time frame.

Till now, IT companies have shown mixed performance. However, revenue guidance remains strong for FY23E. 

Just to highlight, Infosys’ FY2023 revenue growth guidance of 13-15 percent was much ahead of our estimate of 11-13 percent. 

The growth guidance is front-ended implying visibility from contracts that flow through in the near term. 

The pain point is the margin guidance. Infosys has cut the margin guidance band to 21-23 percent from 22-24 percent. 

Post Q4FY22 results, most of the IT companies have corrected. We believe investors should focus on large cap IT companies only.

FPIs have been selling Indian equities since October 2021 and a respite looks unlikely considering the looming rate hikes. How do you see this FPI trend for the next few months? What can bring them back to the market in near future?

FPI flows continue to be negative although the pace of selling reduced in April 2022 as compared to March 2022, which was a month of record outflow. 

FIIs may remain negative in the near term and remain sellers in Indian markets, but the magnitude of selling may go down in the future months as the economy is on strong footing and the earnings of corporates remain strong. 

Resolution to Russia Ukraine War, a solution to global supply chain constraints, low leverage, earnings beat, strong GDP growth, improving investment cycle and favorable macro policy environment can bring them back to the market in near future.

The economy is giving mixed signals. While the GST collections are at record highs, other macro indicators are showing momentum slowing. What is your view on the economy?

GST collection in April touched an all-time high of over 1.68 lakh crore. It is for the first time that gross GST collection has crossed the 1.50 lakh crore mark. 

The total number of e-way bills generated in the month of March 2022 was 7.7 crore, which is 13 percent higher than the 6.8 crore e-way bills generated in the month of February 2022, which reflects the recovery of business activity at a faster pace. 

Also, we note strong progress under the production linked incentive (PLI) scheme with increasing visibility on new manufacturing capacities across sectors. 

The government is promoting the manufacturing and infrastructure sector through the PLI scheme Accordingly, we expect India’s GDP to grow by 8.9 percent in FY22E, 8.1 percent in FY23E and 6.5 percent in FY24E.

One sector that has been buzzing of late is the hotel sector. Do you think the strong demand that the industry is witnessing now can sustain? Will you recommend investing in hotel players at this juncture?

The hotel sector has been one of the key beneficiaries of the post-Covid rebound in economic activity. 

With tourism travel picking up coupled with a gradual recovery in business travel, the occupancy rate and average room rate will likely see improvement. 

Higher revenue coupled with a lean cost structure is expected to result in improved operating leverage for players in the hotel industry.

What sectors are you betting on at this juncture?

Going forward, we expect the composition of earnings in FY23-24 to change with higher incremental contribution from commodity sectors at the expense of consumption sectors. 

The Nifty is trading at rich valuations of 21 times FY23E earnings and 18.6 times FY24E earnings based on long-term multiples and yield gap while pricing in moderate earnings growth of 17.6 percent in FY23E and 10.6 in FY24E. 

We expect growth stocks to continue to trade at rich valuations, value stocks can have moderate re-rating and banks and diversified financials are trading at reasonable valuations.

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

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First Published: 07 May 2022, 10:27 AM IST