The second quarter earnings season for this fiscal has thrown up encouraging trends in the discretionary consumption space across apparels, travel and tourism, jewellery, malls, retail, and private vehicles, accoridng to Sanjay Kumar of PNB MetLife.
Management commentaries have been strong on the demand environment and margin trajectory. Earnings performance, inflation trajectory and FII flows would be the key factors determining mood of the equity markets over next few months, the chief investment officer says in an interview with Moneycontrol, backed by his more than two decades of experience in financial services.
With adequate provisions and stronger balance sheets of Indian corporates, the outlook for banking and NBFC sector looks promising, says Kumar. His investment team manages a diversified portfolio of over $ 4 billion in equity, fixed income, and real estate assets. Excerpts from the discussion:
What are your thoughts on the September quarter earnings season and what are the most surprising elements in earnings?
The aggregate second-quarter performance has been above expectations. While banks, automobile and information technology sectors posted a beat on expectations, energy, metals and materials have seen weak results owing to a fall in commodity prices.
The home-facing sector have fared well as compared to export-focused sectors as they saw the impact of global growth slowdown and monetary tightening.
Encouraging trends have been observed in the discretionary consumption space across apparels, travel & tourism, jewellery, malls, retail, and private vehicles. Management commentaries have been strong on the demand environment and margin trajectory.
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What are the most important factors to watch out for in rest of financial year that can change the equity market mood?
Earnings performance, inflation trajectory and FII flows would be the key factors determining mood of the equity markets over next few months.
Earnings trajectory would be key determinant of growth-related price movement, especially in an uncertain macro environment. This has also been the driving factor for India’s outperformance so far. As benefits of the recent moderation in commodity costs start accruing in 2HFY23, we expect other sectors to contribute to overall earnings growth.
Inflation will define valuation re-rating / de-rating potential, especially considering relatively premium valuations in India. Markets would be tracking for signs of durable easing of inflation, which would pave way for easing of rate hikes which in turn will have implication for valuations.
FII flows have been volatile over the last few months amidst uncertain global macro-economic as well as geo-political environment. Developments in these areas will be keenly tracked to ascertain the direction of money flows.
Do you see big bull rally in banking and NBFCs in coming quarters, given the changing and improving environment?
The economic environment seems to be conducive with loan growth accelerating to multi-year highs owing to a healthy revival in the corporate segment, steady growth in the retail, MSME and Agriculture segments. Rising interest rates bode well for margin trajectory and high mix of CASA and floating rate loans should provide support to margin even as we expect funding cost to increase going ahead.
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Credit cost has been undershooting across banks and is likely to remain under control, per management commentaries. With adequate provisions and stronger balance sheets of Indian corporates’, the outlook for Banking and NBFC sector looks promising.
Though valuations have caught up over the last few months and are now in-line with long term average, the likely strong earnings momentum should augur well for delivering healthy returns.
Do you see elevated interest rates in next calendar year or is there any cut in rates?
In recent monetary policy committee meetings, RBI Governor has reiterated the need to bring down inflation to the target mid-point of 4 percent.
Globally, markets are projecting the US economy to slow down sufficiently by H2 CY 2023 to prompt rate cuts by Fed towards the end of CY 2023; if such a scenario were to play out, depending on domestic macro developments, the MPC may also contemplate bringing down policy rates in India in H2 CY 2023.
What are your thoughts on PSU space that have seen strong run-up in the past few weeks? Are you bullish on the space?
The operating environment for PSU banks has been very positive led by surging loan growth, expansion in margins, controlled operating expenses and decline in credit cost. Moderation in slippages along with healthy recoveries and upgrades have resulted in an improvement in asset quality ratios. These factors are driving significant improvement in profitability and a resultant rally in the stock price of PSU banks.
The PSU banks continue to remain strong deposit franchises providing cushion to incremental margin pressures. The incremental credit cost is likely to remain under control given the elevated provisioning coverage across PSU banks.
Do you think the final economic growth numbers for FY23 will surprise the Street?
On an aggregate level, FY 2023 GDP growth is expected to be broadly in line with RBI’s projection of 7 percent. A significant part of the economic recovery in the immediate post pandemic period was enabled by a strong rebound in the global economy.
However, at the current juncture, there are signs indicating that global economic activity has started to slow down. On the other hand, domestic demand particularly in the services sector continues to show traction. As such, growth drivers in the short to medium term are likely to be increasingly domestic given headwinds in the external sector.
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