Daily Voice | Two themes to bet on with a 3-year horizon, says Naveen Chandramohan of ITUS Capital

Market Outlook

The September-quarter earnings was not a major surprise for the ITUS Capital Founder and Fund Manager Naveen Chandramohan but it was interesting to see how some companies transferred the cost-side inflation to their end-clients, driving home a big positive for their earnings growth.

Chandramohan believes IT and technology along with financialisation themes will continue to do well in India. The seasoned financial analyst shares his views about the economy and the financial sector in the country in an interview with Moneycontrol. Excerpts from the interaction:

Where do you see the GDP growth rate for the second quarter? The number is expected by the end of this month.

I would prefer to look at the GDP numbers with the annualised numbers, rather than quarterly figures. There is, however, a lot of noise around the quarterly numbers, especially around base effect, short-term demand cycles and inflationary pick-up. Having said that, my expectation for Q2FY22 real numbers would be a growth of 9 percent. At an annualised number, I would look at our real GDP growth to be at 10.5 percent at the end of the fiscal year.

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Do you think one should increase exposure to debt and reduce it to equity, anticipating a change in the central bank’s stance?

I have always looked at debt as an opportunistic asset class, rather than a structural one. I believe investors should be comfortable to take a slightly longer term view on debt, too, rather than reacting to short-term policy change. Today, I believe rates and credit risks are mispriced and I would not be looking at increasing debt exposure today.

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In fact, on the contrary, I would look to reduce debt exposure and increase it towards equities if an investor can take a three-year-plus allocation on the capital. I believe investors would get pockets of volatility over the next six months which can be used to add equity exposure into companies that continue to grow cash flows and reinvest them well.

What are the two sectors that one must have in the portfolio now, to get healthy returns by end of 2022?

We have approached equities from a business-first perspective, instead of sector-first. Equities are not meant to give returns every year and it’s easy to get swayed with our expectations based on what happened in the last year. If I were to rephrase this question into sectors one must look at owning over the next 3+ years, I would continue to believe IT  and technology, along with financialisation themes in India, will continue to do well (the latter includes AMCs, exchanges and financial intermediaries).

The IT story is expected to remain solid going ahead. But isn’t it time to go slow on the segment as the number of positive surprises have reduced?

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This is precisely why we do not manage portfolios from a top-down perspective. In our minds, the so-called IT story has too many entanglements within. We continue to own and like financial infrastructure companies, platforms, tech-enabled businesses.

Some of the businesses we own here have tailwinds behind them which could well continue into the next five years. Within the same IT story, there are companies where the market has fully discounted the growth and are overpriced. Unless one speaks from a business-first approach, the ‘IT story’ to us is bifurcated.

What are the biggest events to watch out in the rest of FY22?

We have been talking about QE (quantitative easing) and liquidity being pulled out of the system for the last five years. I believe we will continue to speak about them along with when Fed increases its rates.

Within India, it’s important for investors to focus on the micro and the earnings growth on the ground. We have set a strong base today, and with capex being set up – public and private – it’s important we do not get too lost in the macro and continue to focus on the earnings growth of individual businesses.

Have you changed your earnings estimates for FY22-FY23 after September quarter earnings season?

At ITUS, we do not change our estimates based on a quarter of earnings. We look at the growth rate of our companies alongside the implied growth at which the market is discounting cash flows into the future. This inherently brings in a slightly longer-term thinking to the earnings of the companies.

Going into the September quarter, I believe one had to factor in multiple quarters of margin pressure. Effectively, the earnings that were reported were not a surprise. It was interesting, however, to see some of the companies having the ability to transfer the inflation on the cost side to their end clients, which was a big positive for the earnings growth of them.

What are your broad expectations from the Monetary Policy meeting scheduled next month?

I have maintained that the RBI will be slower-than-expected to raise rates. There are inflationary pressures on the demand side today, however, I believe they will look at growth picking up from here before they look at taking action in the policy meeting around rates.

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