With the inflation hovering on 7 percent, the impact on margins and profitability of businesses is likely to be tracked closely. Valuations might be a concern in some pockets but they are more in line with the long-term averages.
These are certain thoughts Aniruddha Naha, Head of Equities at PGIM India Mutual Fund, shares with Moneycontrol during an interaction.
Large-cap stocks have generally corrected and since their valuations are in line with the long-term averages, it will be difficult for mid-caps and small-caps to outperform in a big way this financial year, says the fund manager for PGIM India Flexi Cap Fund, PGIM India Small Cap Fund and PGIM India Midcap Opportunities Fund.
Excerpts from the discussion:
What are your thoughts on the Fed’s aggressive move? What do the key indicators (including bond yields) say?
The Fed has the dilemma of increased inflation on one hand, and an inversion in the yield curve on the other hand. Inflation is high due to commodity and energy prices and more likely than not, food inflation will also contribute going ahead. The Fed has clearly indicated higher interest rates and liquidity tightening.
The dilemma is, an inverting yield curve (10-year/2-year) is indicating a slowdown in the US economy in the near future. Hence for the Fed, it’s a dilemma between inflation and an impending slowdown.
Given that, inflation is already in the house and a slowdown is still knocking on the door, it’s more likely that the Fed will tackle inflation first and hope to see a softer landing of the economy.
Do you see a significant impact of inflation on corporate earnings? Are you revising your earnings estimates down for FY23?
India is an importer of commodities and energy, and rising prices will definitely reflect in corporate profitability in the form of compressed margins. There will be a set of businesses which might want to pass on the input prices to the consumer, but given the extent of inflation, it is unlikely that corporates will be able to pass on the full hike without impacting topline growth.
Commodity companies at the beginning of a value chain should benefit from higher raw material prices.
How do you approach the markets for FY23 as the start for the new financial year is very strong?
After strong two years, we expect returns to be more subdued, given higher inflation, broken supply chains and a strong base in returns in the last one year.
What are your overall thoughts on HDFC and HDFC Bank merger? Do you expect more consolidation in the financial space as we move forward?
We do not comment on individual names. The financial industry has seen increased competition, as the number of participants have gone up, resulting in a fragmentation of the market. Fragmentation of any industry invariably leads to lower ROCE (return on capital employed) and ROE (return on equity), due to competitive intensity. A consolidation in the industry is generally good for the incumbents, as it brings in some pricing power.
What could be biggest risk for the market hereon – is it inflation or valuations?
Inflation and its impact on margins and profitability would be something which we will be tracking closely. Higher levels of inflation has an impact on the macros, as it has an impact on interest rates and the Current Account Deficit (CAD). Valuations might be a concern in some pockets but they are more in line with the long term averages.
RBI remains behind the curve and is expected to be so at least in the first half of FY23 as it is more focussing on growth. What are your thoughts?
We do not think that RBI is behind the curve. RBI has clearly articulated its stance and position and we think RBI is justified in being calibrated in their actions.
We believe that RBI in its April 8th policy has very clearly prioritised inflation over growth and we think that RBI has managed the monetary policy pretty well over the years and they will continue to do justice to their mandate going ahead also.
Do you expect mid-caps and small-caps to outperform large-caps in new financial year?
Large caps have generally corrected and valuations are in line with the long term averages. The valuations in the midcap and small cap segment do have pockets which are elevated.
This financial year, given the valuations of the largecap segment, it will be difficult for midcaps and smallcaps to outperform in a big way.
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