“Consensus expects Nifty earnings to grow by 8-9 percent for FY23 and 15-16 percent for FY24. We expect earnings growth to be driven by BFSI and Auto sectors,” Amit Premchandani of UTI AMC says in an interview to Moneycontrol.
He believes financial services is among the sectors that are attractive under the value investment framework as it is well placed to participate in the cyclical recovery on account of reasonable valuations.
The Senior Vice President & Fund Manager – Equity with more than 13 years of experience in fund management, equity research and capital markets says valuations in India are now at the upper end of the fair value zone, which reduces the probability of multiple expansion, hence returns will largely be subject to earnings growth.
Do you think India will continue to report average economic growth of 5.5-6 percent in the decade ahead?
At a fundamental level, economic growth is a function of productivity and population growth. Economic policy is likely to affect productivity growth. We have seen policy push reducing regulatory cholesterol at various levels, the focus has been on supply-side reforms in factors of production. The balance sheets of corporate India as well as households are healthy. This should provide a good base for growth to sustain at 5-6 percent levels.
Do you believe the Indian economy can withstand all expected challenges in the coming decade, as we did in the last two years?
One should be hopeful about the trajectory of the economy. India was one of the few countries which did not succumb to the pressure of expanding the fiscal deficit during lockdowns. The fiscal deficit in India has been managed prudently and expansion during the pandemic was driven by food subsidy and health-related expenditure, while some of the off-balance sheet numbers were brought into the books. Hence, the fiscal push to inflation has been muted. In retrospect, it appears to have worked well as the western economy is facing a sharp increase in inflation largely driven by a bloated fiscal deficit. On the geopolitical front, we have managed to secure our interests. The last decade has seen growth largely driven by consumption, capex growth has been episodic and private corporate sector capex is yet to pick up meaningfully despite a sharp cut in tax rates. Household capex has started to inch up driven by demand for housing. We need a period of sustainable capex growth to make growth sustainable.
Do you expect India to report strong double-digit earnings growth in the coming years and why?
Consensus expects Nifty earnings to grow by 8-9 percent for FY23 and 15-16 percent for FY24. We expect earnings growth to be driven by BFSI and Auto sectors.
After significant volatility in 2022, what are your thoughts on markets for 2023?
2022 was the year which saw a clear reversal of the zero interest rates regime of the western world which had broadly continued since the global financial crisis. The impact of the sharp increase in rates will reflect in growth in 2023 as monetary policy works with a lag. Valuations have corrected globally to reasonable levels though it’s not clear whether it will account for earning downgrades, which are likely if recession sets in. India has been a positive outlier in 2022, which has resulted in its premium expanding meaningfully over other markets. Valuations in India are now at the upper end of the fair value zone, which reduces the probability of multiple expansions, and returns will largely be subject to earnings growth. Higher interest rates also open up an avenue for investment in fixed-income instruments, earning yield is now at a significant premium to G-Sec yield which provides better risk-reward for fixed-income instruments.
Do you expect strong private capex in the coming years?
Capacity utilisation in India had fallen to early 60 levels in FY21, which has now inched up to mid-70 levels. As utilisation inches up to early 80 levels, we can expect expansion plan announcements from corporates. Renewables, steel and cement sectors have seen capex announcements.
Unlike the 2008-12 cycle when thermal power and telecom drove capex, the drivers this time could be renewable power, electric vehicle ecosystem and sectors that have seen PLI benefits.
Real estate is a large part of the overall capex in the country. Post 2012-20 downcycle, we are seeing early signs of revival with demand inching up and inventory going down. Launch activity has also shown early signs of a pick-up.
Do you expect the central banks including RBI to cut policy rates in the second half of 2023?
It’s premature to talk about a cut in policy rate when inflation is more than 3x of the target in the western world. In India rates are only marginally above pre-Covid levels, RBI has started focusing on sticky core inflation, hence we do not expect a cut in policy rates in the current environment.
Which are the themes that can give healthy returns in the coming year?
Some of the sectors we find attractive under our value investment framework are:
Financial Services
Loan growth has revived with a pick-up in nominal GDP while higher inflation has also led to working capital-led demand from the corporate sector. Retail remains the key driver of loan growth. The sector is well placed to participate in the cyclical recovery on account of reasonable valuations. Large banks have high capital adequacy, healthy provisioning and a strong liability franchise.
Healthcare
Healthcare is another sector we are bullish on account of low healthcare expenditure relative to GDP, a high-quality manufacturing base in pharma, which can cater to overseas exports. The growth runway is also long with the unfortunate trend of rising chronic diseases linked to lifestyle issues.
Metals
The last 3 years were used by players to improve balance sheets and reduce leverage. Recent commodity price correction and export tax on steel has led to a sharp correction in valuations which has created opportunity. We find valuation comfortable in steel as well as the non-ferrous segment.
Automobile
The sector is showing early signs of volume growth revival after remaining under pressure over the last few years with passenger vehicles (PV) most impacted; Commercial vehicles and PV are showing strong signs of demand revival while 2-wheelers are still lagging. Overall, the sector is poised for a cyclical uptick in margins and growth. Replacement demand as well as preference for personal mobility would be a tailwind going forward. OEMs are largely cash rich with decent balance sheets, hence having the ability to survive the pressure.
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