Daily Voice | Banks in a sweet spot now on strong balance sheets, credit growth, says Srinivas Rao Ravuri of PGIM

Market Outlook
Srinivas Rao Ravuri of PGIM

Srinivas Rao Ravuri of PGIM

“We expect India to outperform in the longer term, given its relatively strong economic footing, healthy earnings growth and a strong and stable policy regime,” Srinivas Rao Ravuri of PGIM India Mutual Fund says in an interview to Moneycontrol.

PGIM India is positive on banks as they are in a sweet spot and are witnessing healthy growth in credit, says the Chief Investment Officer, who is responsible for the overall equity investment and debt platform of PGIM.

Srinivas, with over 24 years of experience in Indian financial markets, primarily in equity research & fund management, says PGIM is also positive on the auto sector but given the strong run-up they would be choosy and adopt a more bottoms-up approach to the sector.

Do you expect the inflation print to remain elevated for the rest of the calendar year?

Inflation should start to taper down in the second half of the financial year, largely due to the base effect. While we have seen absolute price levels come down in a few cases we do not expect the same to be pervasive as global as local supply-side issues are not fully sorted out. On the other hand, crude has also rallied around 10 percent from near lows along with INR depreciation, and the persistence of these poses an upside risk to the near-term inflation print.

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Do you see significant volatility in the equity markets in coming quarters considering the fears of US recession, geopolitical issues, rising interest rates and fund flows?

Volatility is always expected in the short term while in equities the longer the time period under consideration relatively lower is the volatility. However, we are in the midst of a turbulent period and are mindful of the near-term factors such as geopolitical issues and high inflation leading to higher interest rates and lower liquidity scenario. The same has already affected the global markets to varying extents, while India has meaningfully outperformed.

While our economy may be relatively decoupled from the global economy currently, financial markets are certainly not. Further, we need to be watchful of government finances, especially on the trade deficit and forex reserves front, which have a bearing on the macro view of investors.

Nonetheless, we expect India to outperform in the longer term given its relatively strong economic footing, healthy earnings growth and strong and stable policy regime.

Also read – India needs more capital, not just investors, to boost the economy: Samir Arora

Do you think banks, auto and defence sectors are set for a multi-year rally after underperforming over the last 3-5 years?

We are positive on banks as they are in a sweet spot and are witnessing healthy credit growth. Balance sheets of banks and corporate India are fairly strong and the NPA cycle is behind us. The combination of these factors makes us positive on banks for the medium to long term. The auto sector is seeing recovery after a lull and volumes are expected to be decent. The Nifty auto index has rallied smartly in the last 6-7 months and has outperformed the broader index by a decent margin. On the raw material front, there is a respite as well, as there is an easing of supply chain issues. We are also seeing new product launches by companies, particularly on the electric/hybrid platform. While we are positive on auto, given the strong run-up we would be choosy and adopt a more bottoms-up approach to the sector.

Lastly, there is a perceptible change in the defence sector, given the focus on indigenisation, Make in India as well as the upgradation of defence equipment. While we expect defence sector capex to continue to grow at its historical growth rate of around 10 percent, we expect greater domestic procurement to help companies grow at a rate faster than the sector capex growth rate. The sector has tailwinds of favourable government policy, greater inward production push as well as strong demand prospects given the armed forces plan to induct newer and advanced equipment into service.

How do you view the September quarter earnings announced so far and what are your expectations?

It is not right to compare quarterly YoY growth numbers of the recent past as the base quarters had some impact from Covid-related effects. However, a few things that are positive in the results are i) raw material inflation has eased which should reflect in the margins in the next two quarters (not fully this quarter as high-cost inventories would still be there), ii) run-up to the upcoming festive season should help primary sales.

For sectors such as financials, decent credit growth and lower provisioning should lead to healthy profitability. Export-focused sectors should see a tailwind from INR depreciation as well. Sectors like metals, cement and energy are likely to see margin compression. Overall, we expect the result season to see a healthy growth trajectory barring a few pockets.

What are your thoughts on Europe+1 and China+1 themes? Will India be the biggest beneficiary of both these themes?

Firstly, for any of the above themes to work the foremost prerequisite is a competitive cost structure. Thanks to lower labour costs, India is getting attractive relative to China and was always cheaper than Europe. The second requirement is an ecosystem and dependable supply chain to do real value add (and not mere conversion) which we have started to develop.

Thirdly, a favourable and accommodative policy regime that fosters growth in manufacturing. Policies such as the PLI (production-linked incentive) scheme and focus on ease of doing business are helping the first two factors and we have started being recognised as a possible alternative to China. Nonetheless, it won’t happen overnight but we are on the right path and need continuation of the above factors for the opportunity to materialise and be monetised.

The large caps are benefiting ELSS Funds. How do you see the investment strategy going forward?

The ELSS category benefits from a three-year lock-in, which is good enough time for a mid to long-term investment thesis to start playing out. The category is a relatively conservative category and hence has a bias towards large caps. We believe the ELSS portfolio should be a combination of strong large caps and high conviction mid and small caps and this should help the portfolio outperform in its investment horizon time frame.

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