In the medium-term, not only will the auto sector see higher volumes, but there will also be operating leverage and pricing power, said Sachin Trivedi, Head of Research (Equity) and Fund Manager, UTI AMC. In an interview with MintGenie, he said he likes select names in auto and auto ancillary segments along with some private sector banks.
Edited excerpts:
Headwinds for the market seem to have refused to fade away. We are yet to see an end to the Ukraine crisis, and now we have the Taiwan issue. Can we expect a healthy return from Nifty this year? What should be the strategy for equity investment in the current macroeconomic environment?
Broader indices in India, post-correction, have provided a positive return of around 15 to 16% in the last two months. The Indian equity market has outperformed various other developing and developed markets too.
This suggests that investors have faith in the country and longer-term growth outlook, and fundamentals have not changed materially due to issues emerging from geopolitical events.
There is likely to be a near-term earnings impact due to events like the Ukraine crisis, which disrupts the supply chain and further fuels inflationary pressures. And some participants will react to this.
Equity markets are volatile and emerging risk from unknown events stresses stock prices. But eventually, markets focus on earning and earnings outlook in the longer term.
Historical data suggest the probability of improving returns in the market increases in the long run; therefore, I urge investors to allocate money towards equity as a long-term investment and not worry about the short term.
After all, in the last two decades, we have seen multiple wars and financial crises, and despite the same Nifty index has given a CAGR of 16.8%, which is more than 21 times the original investment amount.
Investors should use any correction to the right size asset allocation, and if equity corrects, they should increase weightage to the position.
How worried are you about inflation? Has it peaked in India or we are yet to see the worst? Can we expect a pause in rate hikes after October?
In the last meeting, the MPC unanimously voted to lift the repo rate by 50bp.
They highlight elevated inflation as the key rationale behind the move, with BoP/INR stability also playing a role. So clearly, inflation is a cause of concern, but we are yet to see the full impact of this series of rate hikes on the ground. I believe the effect will come with a lag, so inflation will gradually subside in the coming quarters.
In this rate hike cycle, the bulk of rate actions is front-loaded. I expect RBI action in the future to be more data-dependent.
Is there more steam left in the auto sector? What are the upside and downside risks for this sector?
The Nifty auto index has outperformed the Nifty50 by nearly 20% in the last year, but it is still underperforming by more than 63% in the last five years. This underperformance has been due to a sharp decline in volume since a peak in FY19.
Two-wheeler volumes are down by nearly 36%, M&HCV volumes are down by nearly 38%, and passenger vehicle volumes are down by nearly 9% in FY22 from the FY19 level.
A steep increase in the cost of ownership at a time when incomes got challenged due to the pandemic has caused this decline.
However, the bulk of cost increases are behind, and pressures are easing (post-cool-off in commodities), whereas economic activity is inching back to normalization.
The normalisation of economic activity will improve per capita income and therefore demand in the sector.
In the medium-term, not only will this sector see higher volumes, but there will also be operating leverage and pricing power.
A combination of all of these should result in significant improvement in the profitability of the industry.
What sectors are you bullish on in this market? What are the factors that make you positive about these sectors?
Our stock selection is a more bottom-up approach; therefore, company-specific factors are dominant drivers for our selection. I like select names in private sector banks.
I believe their credit cost should be well under control and they are well capitalized to participate in the credit growth cycle.
Even on the valuation matrix, we think they are reasonable. I also like select names in auto and auto ancillary segments.
The penetration level for the auto sector in India is on the lower side. Sub-segments in the auto sector have grown at the high single-digit to early double-digit in the longer run, before contraction.
There is also longer-term opportunity in sectors like logistics and real estate, where I see space getting consolidated and organized players have the potential to grow market share and improve profitability.
I also like select names which have seen the brunt of inflationary pressure in the last couple of quarters, and as commodity inflation eases, they will improve profitability.
Disclaimer: The views and recommendations are those of the analyst and not of MintGenie.
