“A good Rabi crop harvest is now critical for rural demand revival and, in turn, improvement in pricing power of different industries,” Ashutosh Tiwari, Managing Director-Equities, Equirus, said in an interview with Moneycontrol.
After a significant rise in commodity prices, he feels margins are likely to remain under pressure due to commodity inflation as well as an increase in freight costs due to the rise in diesel prices, and believes that price increases by corporates will be gradual.
Hence, margin normalisation will take 2-3 quarters if commodity prices stabilise, says Tiwari, who has more than a decade of experience in equity research. Edited excerpts:
Do you think the Fed action going ahead will be a bigger cue than the Ukraine-Russia war now, for the equity market?
The Ukraine-Russia war seems to be priced in by the market. Fed rates are likely to go up to the level of 2-2.25 percent over the next one year, driven by inflation. If there is a further increase in commodity-led inflation then the reaction of the Fed will be more important for the markets.
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Indian equities seem to be resilient now despite current global concerns. Do you think the market sensed that oil is going to fall below $ 100 a barrel once the Ukraine crisis ends?
We don’t think that one can conclude that oil prices will decline sharply in the near term as countries will look beyond Russia to meet their energy needs, which will also require investments in oil & gas assets. Domestic flows are very strong in India, which has supported markets very well despite significant selling by FIIs.
Corporates are going to see major margin pressure due to the sharp rise in commodity prices. According to you, will the situation be very bad if we consider the next 2-3 quarters in terms of corporate earnings across industries?
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Margins are likely to remain under pressure due to commodity inflation as well as the increase in freight costs due to the rise in diesel prices. Pricing power in most industries has been impacted by sluggish demand, especially in rural areas, as rural incomes were impacted by the COVID second wave. It was expected to improve post the Rabi crop harvest but the delayed and erratic monsoon didn’t help.
A good Rabi crop harvest is now critical for rural demand revival and, in turn, improvement in pricing power of different industries. We believe that price increases will be gradual and hence margin normalisation will take 2-3 quarters if commodity prices stabilise.
How should one approach the banking as well as financial segments, given the expectations of significant rate hikes in the coming period?
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We expect capex recovery and therefore a pick-up in corporate credit growth. Rate hikes will be more painful for NBFCs and banks having lower CASA franchise and therefore large private sector banks and SBI are likely to fare better as they will be better able to manage their NIMs.
How do you read the mega merger between Inox Leisure and PVR announced last week? Do you see any regulatory hurdles for the same?
PVR and INOX together will have 1,546 screens i.e., 46 percent screen share among multiplexes and 16 percent share overall. We believe the advertisement income per screen of both INOX and PVR will see an upgrade post-merger. As COVID restrictions are largely behind us, the exhibition industry has bounced Back very strongly.
Movies like Kashmir files and RRR got a great response in March and the movie pipeline remains very strong. We believe that it’s a win-win event for both and are positive on these companies.
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As overall market share is less for the combined entity, regulatory approvals are likely to come through, but it is difficult to comment with certainty.
NPPA has announced a price hike for 800 essential drugs with effect from April 1. Which are the biggest beneficiaries among pharma companies
Price changes in NLEM drugs are linked to WPI and therefore with the rise in WPI, there was already an expectation of a 10 percent increase, which came slightly higher at 10.8 percent. Companies like JB Chemicals, FDC, Abbott and Sanofi have higher exposure to NLEM drugs in their sales and will see the benefit. However as the increase in pricing is on expected lines, we don’t see much of an impact on stock prices.
What are the sectors that could get more attention now as we enter FY23?
We believe that Capex and Real Estate recovery is the theme for the next few years and therefore we expect a better performance by Capital goods, Industrial, Real Estate and Building material companies. Autos are likely to see a cyclical recovery as rural incomes revive and supply side issues get resolved with a gradual recovery in chip availability. The commodity upcycle will continue to benefit metal companies.
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