Shibani Sircar Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company believes while we navigate the near-term uncertainty, corporate earnings growth in India would remain well placed and likely in the mid-teens territory. In an interview with MintGenie, Kurian said she is positive about the auto sector but cautious about IT.
Edited excerpts:
Many analysts have started saying it is time to invest in the India story and look at the domestic theme. Do you agree? What, as per you, are the positive points about the domestic theme?
While there are uncertainties over growth and inflation the world over, our belief is that the Indian economy remains well placed on growth.
India is likely to remain one of the fastest-growing economies in the world. Domestic macro parameters today are far better placed than they were during the taper tantrum or during the financial crisis of 2007-2008.
Domestic demand trends have been largely resilient as evidenced by high-frequency economic indicators and credit growth is finally showing signs of a pick-up.
After a long period of anaemic credit growth, we are encouraged by the pick seen across sectors especially retail and MSME over the past few months. We have also started seeing corrections in terms of commodity prices.
If this trend continues, it is likely that in the second half of the year (H2CY22), the focus would shift from inflation to growth. In that context, we must remember that India is a net importer overall even after factoring in net services exports.
While it’s true that India cannot be completely immune if there is a global recession, a substantial moderation in commodity prices helps domestic macro on an overall basis.
This is probably the first time when there is a looming risk of a recession while the FED is tightening interest rates aggressively. What impact can this combination of Fed rate hikes and a US recession have on the Indian market?
Near term, given the many uncertainties surrounding the global macro environment, it is likely that equity markets remain volatile.
However, our hope is that the second half of the current fiscal would likely be much calmer than the first half as the current trend of fall in commodity prices continues. While the global growth outlook is uncertain, India appears to be far more resilient in relative terms.
We have been of the belief that this year will be a year of bottom-up stock picking. While headline valuations are now close to the historical average, the correction has been far steeper at a stock level.
Therefore we are looking at companies which are market leaders in their sectors and sub-sectors, have strong balance sheets and cash flows and where valuations are reasonable.
It is widely expected that the RBI will hike rates in its August and October policy meet. Do you think the central bank might take a pause after October on rate hikes in order to save the economy from a major setback?
There are many moving parts that would likely decide the trajectory of the rate cycle in India. By and large, we do expect RBI’s rate hike cycle to be front-loaded in nature.
Commodity prices have started correcting and there are signs of correction in food prices too.
If this trend continues then there is a possibility that by Q4FY23, the headline CPI inflation could move closer to RBI’s comfort zone.
The other key factor that would likely determine RBI’s course of action would be the trajectory of rate hikes by the US Fed and the movement of the INR versus the USD.
So far, policymakers have been successful in ensuring that the currency depreciation has been orderly in nature.
Policymakers have also taken a series of incremental measures to stem INR deprecation and more such policy tweaks cannot be ruled out.
How should one invest in rate-sensitive stocks in a rate hike regime?
We are positive on banks in the current environment especially the larger private sector banks and select large PSU banks.
In the initial part of a rising rate cycle, banks which have a higher share of floating rate loans, a strong retail liability franchise and CASA (low-cost deposits) share tend to be better placed.
With credit costs normalisation, it is likely that the focus would shift toward loan growth and liability accretion.
In this context, the trend of large private sector banks gaining market share in loans and deposits is likely to continue.
These banks are well placed in terms of superior return ratios, are well capitalised and trade at reasonable valuations.
There is a risk of an earning downgrade post Q1 result. How should investors look at it? Do they need to be cautious?
Despite significant macro volatility, headline Nifty earnings have remained fairly resilient in FY22 and FY23E.
Near term, however, corporate earnings in Q1 and Q2 FY 23 could see some pressure on margins due to higher input costs even as revenue growth is likely to remain buoyant.
While we navigate the near-term uncertainty, structurally we believe that corporate earnings growth in India would remain well placed and likely in the mid-teens territory.
In fact, India’s corporate profit to GDP ratio is at a decadal high with Nifty 500 companies reporting profit/GDP at 4.3% as compared to 2.2% in FY20.
Auto stocks are hogging the limelight. Sectors such as IT are witnessing outflow while investors are betting on the auto sector. What are your views on the IT and auto sector? Which sector out of these two will you bet on?
We are positive on the auto sector while being cautious in the near term on technology, especially the mid-cap tech stocks.
In the auto sector, we expect to see normalization of long-term growth rates post a multi-decadal low.
Execution abilities and supply chain management will be the key differentiators among companies which would likely determine volume growth as demand picks up in select pockets.
Further, if commodity costs continue to decline, it could be positive for margins in the medium term even while there are near-term pressures.
Our preference within the auto pack is for the four-wheeler segment over the others given that inventory levels are low and new product launches are likely to drive growth.
We have been cautious about IT as a sector over the past few months and while valuations have corrected we continue to remain somewhat cautious with a preference for large-cap IT over the mid-cap.
The digital transformation opportunity for the sector is structural over the medium to long term. However, there are near-term headwinds that the sector has to navigate.
The supply side pressures and the impact on margins are now well known, however, we now have to contend with volatility in revenue growth trajectory given the uncertainty surrounding global growth.
While we are cautious in the near term, we do believe that Indian IT companies have emerged as strong digital transformation partners to many companies with cost leadership and talent which is a long-term advantage over global competitions.
Disclaimer: The views and recommendations made above are those of the analysts and not of MintGenie.
