Kotak Mahindra Asset Management Company expects the earnings trends to improve from the second half, despite a sharp spike in commodity costs, Shibani Sircar Kurian shares in an interview to Moneycontrol.
In the second quarter, she says, corporate commentary would be the key to watch out especially in terms of the demand outlook. This will determine the fate for sectors such as technology where order wins and deal flows would be the key monitorable rather than the actual quarterly outcomes.
In the medium term, the senior executive vice-president and head of equity research with nearly 17 years of experience in the Indian equity markets believes the outlook for the market remains healthy, given the strength of domestic macro growth and corporate earnings trajectory.
“We continue to believe that bottom-up stock picking will be the way to navigate the near term volatility focusing on high growth high quality companies trading at reasonable valuations,” Shibani says. Excerpts from the interview:
Do you think the Fed rate hikes and inflation will continue to dictate global markets? In the same context, what about inflation? Do you think it has peaked in Asia?
Higher interest rates and inflation are likely to be sticky in the developed world. With inflation in the US now being driven more by services, it is possible that the Fed would continue for the time being on their monetary policy tightening path. The key to watch out for would be the trajectory of US wage growth and the labour market. Given the possibility of higher interest rates globally and uncertainty on growth in the developed geographies like US and Europe, equity markets may remain volatile in the near term. Geopolitical tensions remains the other key risk to monitor.
In the global context, India is clearly an outlier on economic growth. However, India’s recent outperformance has resulted in Nifty P/E trading marginally above historical levels on an absolute basis while on a relative basis, India’s premia to emerging markets is at a historical high. However, in the medium term, we do expect corporate earnings trajectory to remain fairly healthy. Further, high frequency economic indicators point towards improvement in economic activity and the festive season demand has been strong.
Inflation in India at present though ahead of RBI’s comfort zone appears to have peaked or is close to its peak. RBI expects average headline CPI inflation at 6.7 percent in FY23 and average FY24 headline CPI inflation at 5.2 percent. Headline CPI inflation in Q1FY24 is projected at 5 percent which is within RBI’s comfort range of 4 percent (+/-2 percent). Food inflation is the key risk along with commodity costs.
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What are your broad expectations on the overall earnings season?
We believe that in the medium term, India continues to be in the midst of an earnings up-cycle, but the Q2FY23 earnings season will likely see dispersion between sectors. The earnings season comes on the backdrop of fairly resilient demand and consumer sentiment which has seen improvement going into the festive season.
While input cost pressures have abated with the decline in commodity costs, Q2FY23 could witness the residual impact of raw material inflation on margins. Further, we expect weaker performance in sectors such as metals and oil and gas. Excluding the sectors which have global linkages, earnings trajectory for Nifty would likely remain healthy driven by domestic facing sectors such as banks and autos etc.
We expect earnings trends to improve from H2FY23 onwards, notwithstanding a sharp increase in commodity costs. In Q2FY23, corporate commentary would be the key to watch out especially in terms of the demand outlook. This would be key in sectors such as technology where order wins and deal flows would be the key monitorable rather than the actual quarterly outcomes.
What are the sectors that may turn hits and misses in the September quarter?
Overall the sectors which have a greater linkages to domestic economy would likely fare better in Q2FY23 while trends are expected to be muted for sectors with global linkages. Among the sectors that are expected to fare better are automobiles (better demand and easing supply constraints including improvement in chip availability) and banks (strong loan growth, NIM expansion and decline in loan-loss provisions) and diversified financials (accelerating loan growth).
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Banks as a universe will probably see a strong trajectory of growth led by better credit growth, transmission of interest rate hikes and better asset quality trends. The growth is likely to be well spread uniformly between large cap banks as well mid / small cap banks.
Net profit growth of construction materials (margins impacted likely by high fuel and power costs), metals and mining (lower commodity prices and weak realization) and oil and gas (weak refining margins, inventory and marketing losses in case of downstream oil companies) are likely to be impacted both sequentially as well as YoY basis.
What are the key focus areas for the equity markets and how do you think the market will behave in the rest of the financial year? Also, what are the chances of the market getting back to the June lows?
Going ahead, there are multiple global macro factors at play and higher interest rates and inflation are likely to be sticky in the developed world. Indian growth outlook appears stable and a relative outlier. However, given the outperformance of the Indian markets and with relative valuations appearing stretched, it is possible that markets see some volatility in the near term.
In the medium term, the outlook for equity markets remains healthy, given the strength of domestic macro growth and corporate earnings trajectory. We continue to believe that bottom up stock picking will be the way to navigate the near term volatility focusing on high growth high quality companies trading at reasonable valuations.
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Do you see major impact of strong dollar environment on Asian currencies, including the rupee? Do you think the RBI allow the rupee to depreciate instead of going for aggressive rate hikes in the next meetings?
With the uncertainty in macro parameters of growth, interest rates and inflation in most of the large economies of the world, it is likely that Dollar strength continues in the near term given the flight to safety.
RBI has stuck to their stated objective of not targeting a level of the currency but rather managing currency volatility. We expect that this stance would remain unchanged. With forex reserves now at ~9 months of imports and with oil prices and CAD (current account deficit) remaining elevated, we expect the near term depreciating bias of INR/USD to continue.
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