Varun Lohchab is the Head of Institutional Research at HDFC Securities.
HDFC Securities believes private sector capex is on the cusp of a pickup, aided by a confluence of multiple enablers such as deleveraged corporate balance sheets and healthy profitability, well-capitalised banking system with NPA (non-performing asset) cycle over, rising domestic demand, mid-cycle capacity utilisation, and interest rates, Varun Lohchab, head of institutional research tells Moneycontrol in an interview.
The brokerage remains positive on investment-led growth cycle. “Our top picks within our coverage universe to play this multi-year theme are financials and capital goods/infrastructure, says the equity market specialist who has led buy-side and sell-side firms such as Fidelity, Franklin Templeton, and Jefferies.
Do you think the capex cycle in India seems to be gathering momentum after a decade?
Our findings and analysis suggest so. While there were false starts in the last decade, we believe the recent post-COVID pickup is looking sustainable and drivers are in place for multi-year growth. While to an extent government capex growth would remain a function of tax collections (FY23 expected to be strong) we believe private sector capex is on the cusp of a pickup aided by a confluence of multiple enablers such as deleveraged corporate balance sheets and healthy profitability, well-capitalised banking system with NPA cycle over, rising domestic demand, mid-cycle capacity utilisation, and interest rates.
Also which sectors will contribute the most in capex cycle?
In absolute terms, the sectors that are leading the private sector capex charge are metals, power, telecom, cement, autos, oil & gas, and IT. Public sector capex is primarily being done in roads, railways, power, defence, and various rural-focused welfare schemes.
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What are the themes/stocks to bet on if you feel the capex cycle in India seems to be gathering momentum?
We remain positive on investment-led growth cycle. Our top picks within our coverage universe to play this multi-year theme are financials as a play on credit growth (ICICI Bank and Axis Bank), capital goods/infrastructure to target project development (Larsen & Toubro, Siemens, Cummins, and G R Infraprojects) and capacity expansion-led volume growth in UltraTech Cement, Dalmia Bharat, Navin Fluorine, Aarti Industries, NTPC, Phoenix Mills, and Havells India.
What is your overall analysis of earnings in the first quarter of FY23 and what is the trend you expect in coming three quarters?
First quarter earnings season saw an overall in-line performance with wide divergences across sectors and companies. Our coverage universe saw strong year on year growth in financials, consumers, industrials, chemicals, and power segments, while energy and cement sectors disappointed. IT (information technology) continued its steady growth. The common theme across management commentaries was attempts toward increasing product prices to pass on elevated input costs in a calibrated manner.
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Industry expects cost inflation to normalise and operating margins to gradually recover by the third quarter of FY23. FY23 and FY24 Profit After Tax cuts for the aggregate corporate pool were 1.9 and 2.4 percent respectively, lower than the four percent cuts seen in the last quarter. After impressive earnings growth in FY22, we expect earnings to consolidate in FY23 and growth rate to be in high single-digit range.
Do you think the market is overvalued at current levels? Also do you see any possibility of a major correction in coming months and if yes then what could be the reasons?
Currently Nifty is trading at a valuation of 19.5x one-year forward earnings, which is at a premium to historical sustainable valuations of Nifty. While we notice that the recent rally has re-ignited investors enthusiasm, our advice would be to follow a bottom-up stock-picking approach.
At the aggregate index level, a couple of months ago, the risk-reward ratio was favourable and the market was reasonably priced. After the recent rally, it has come to a neutral zone, which still is a good entry point for investors with 18-24-month horizon. We may see some compression in valuation, but returns would still be made in the next two years as FY24 earnings are expected to be better than FY23.
Do you think foreign institutional investor (FII) flow will remain volatile till the global environment and risk factors stabilise?
In our view, the opportunistic section of foreign investors who wanted to take advantage of the country’s potential in the short term had invested in the latter half of 2020 and now they have booked profit and left. It can be observed that in last seven years, net FII inflows in India is only Rs 1 lakh crore (trillion) but overall FII holding remains healthy at north of Rs 50 lakh crore. This indicates that the other segment of FIIs, which have a long horizon of investing, is remaining invested.
We believe that the large portion of FII selling in Indian markets is over. Although there are no clear signs of any sharp increase in FII inflows yet but outflows would be limited. Long-term growth potential of Indian economy will keep attracting foreign investors. There are early signs of gradual FII flow reversal in China and Brazil as well, like India, while Taiwan is still witnessing outflows.
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