Despite factoring in for some downside risks, the earnings trend is expected to stay relatively healthy for most sectors, Venkatesh Sanjeevi of Franklin Templeton India AMC told Moneycontrol in an interview.
Key sectors contributing to earnings growth could include banks, auto, capital goods, and consumer, says the Vice President & Portfolio Manager – Emerging Markets Equity – India at Franklin Templeton, who has been in the investment management industry for 17 years now.
India constitutes a significant part of the emerging markets group and continues to be the fastest growing major economy. Given structural strength and growth potential of the economy, Indian equities are expected to be viewed as a major investment consideration for FPIs over the long term, Venkatesh Sanjeevi believes.
Sanjeevi, who manages Franklin India Bluechip Fund and Franklin India Equity Advantage Fund, advised that investors could look at key themes including cyclical recovery, shift to organized sector leading to market share gains for larger players across sectors and tech-driven disruption. Edited excerpts:
Do you think the auto industry is in the middle of a bull run?
Auto industry (excluding tractors) witnessed weak 3-5 years volume CAGR till FY21 due to a combination of regulatory changes and macroeconomic factors (especially in FY21). We expect strong volume and earnings growth in most segments during FY22-FY24, considering the low base and support from replacement growth.
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Decline in battery cell prices and supportive regulations, taxation, and incentives (including PLI scheme) will help in shift to electric powertrains in the medium term, with the shift likely to happen faster in 3-wheeler and 2-wheeler. Companies which are agile and invest early in differentiated electric vehicle (EV) offering, will be able to gain market share.
Automotive semiconductor shortage is expected to ease in the upcoming quarters. Select companies are likely to benefit from global supply chain realignment opportunities. Raw material inflation is a near term headwind (albeit easing in last couple of months), which will be gradually offset by phased price increases and operating leverage.
Do you expect a significant earnings downgrades?
Weaker external balance situation and currency depreciation along with FPI outflows on the one hand and moderation in global commodity costs on the other hand paint a mixed picture for the Indian corporate earnings trend. Despite factoring in for some downside risks, the earnings trend is expected to stay relatively healthy for most sectors.
Key sectors contributing to earnings growth could include banks (healthy loan growth led by momentum across retail categories and pick-up in corporate credit, asset quality improvements), Auto (strong revenue growth and operating leverage), Capital goods (strong order backlog), consumer sector (staples – revenue growth driven by price increases despite weak volume growth and discretionary – benefit from price hikes and operating leverage).
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Technology sector could see moderate earnings growth impacted by wage hikes and supply-side pressures, despite a depreciation in the INR against the USD. Healthcare and pharmaceuticals are expected to register a YoY decline in revenue led by high base (pandemic-led). Margins could moderate for NBFCs on account of increased cost of funds.
FIIs’ buying interest in India has been renewed after a long time. Do you expect significant inflow in coming months after a large outflow in last 10 months?
After the largest ever massive FPI sell-off from Indian market during CY2022 ($ 29 billion or Rs 2 trillion), FPIs can return to India if there is an improvement in global risk sentiment or relative attractiveness of Indian market. Expectation that growing concerns of global recession would urge the global central banks to moderate their rate actions has triggered the global risk-on sentiments.
However, the primary factors that prompted the FPI sell-off continue to persist – tighter global liquidity, high inflationary conditions and high interest rates.
That said, India constitutes a significant part of the emerging markets group and continues to be the fastest growing major economy. Given structural strength and growth potential of the economy, Indian equities are expected to be viewed as a major investment consideration for FPIs over the long term.
Is it the right time to invest in quality stocks given reasonable valuations or should one wait for more stability in the market? What are the themes that one can buy now?
It is always a right time to identify and invest in quality stocks which command reasonable valuations. Presently, the headwinds to corporate India have led to some earnings downgrade for FY23 and FY24. Any valuation de-rating in high quality stocks will only add to the margin of safety.
Investors could look at key themes including cyclical recovery, shift to organized sector leading to market share gains for larger players across sectors and tech-driven disruption.
Do you think economic recovery is gaining momentum as per GDP growth projections?
While India’s headline growth forecast number has been moderated, some key positives are taking shape in the economy. Domestic capacity utilization levels have been on the rise which could bode well for private capex growth, albeit gradually. This along with support from government spending on infrastructure, government’s supply-side response, ongoing reopening of the economy could aid consumption growth.
At a micro level, high frequency indicators are showing improvement. 70 percent of industrial indicators and 60 percent of consumption indicators have shown MoM improvement. This highlights the broader growth recovery seen in the economy.
Are you still worried about inflation and recession concerns?
Headline inflation trending above 6 percent for most of this financial year seems plausible. This expectation is based on prolonged supply-side disruptions, which keep commodity prices higher and raise the risk of a greater pass through to retail output prices.
Within CPI, food CPI could likely remain high on the back of an imported component in the food basket, rising cost of production and spillovers from international food prices. Furthermore, core inflation could inch up higher as improving demand for services keeps core prices elevated. Inflation may remain elevated in the vicinity of 6.5-7 percent over the next few months since the effect of recent cool-down in global commodity prices could be captured with a delay.
That said, inflation in India may well be more transitory than is being anticipated, especially arising out of supply side imbalances rather than due to overheating of the economy. And to tackle this, the RBI has justifiably been taking calibrated policy actions so as to not sacrifice growth to control inflation. Rate hikes in India are to be viewed as interim measures to cool down the imported inflation.
Focus will be on tightening of liquidity over the next few quarters. Going forward we expect further rate hikes by RBI and a terminal policy rate of 6-6.25 percent by end FY23. With rising global recessionary fears, the pace of policy tightening by global central banks could potentially moderate going forward.
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