All eyes are on the Q3 earnings to track the the post-festive season demand trends and assess the impact of global slowdown. “The body language, commentary and guidance of companies are important to be watched closely,” says Devang Mehta of Centrum Wealth.
Talking to Moneycontrol at length on various macro fundamentals affecting the financial world, the equity advisory services chief at Centrum Wealth harps on the upcoming Budget. This will be the last full-year Budget before the general elections scheduled for early 2024. The finance minister will ideally strive to balance it between fiscal prudence, important reforms and being populist, says the veteran finance professional.
To achieve simplicity and bring efficiency to all categories of taxpayers, he feels, the government is likely to make changes to the tax rates and deductions.
Sustained focus on infrastructure development, power sector reforms, ease of doing business, attracting FDI, incentivising manufacturing top the wish list for most industries, says Mehta, based on his over 17 years of experience across varied functions like investment advisory, equity sales, portfolio management, client relationship management and business development.
Excerpts from the interaction with Moneycontrol:
Do you think India will outperform its global peers in 2023 as well?
Economists predict that the US Federal Reserve will slow down on raising the interest rates this year, as the outlook for the US economy sours. Inflation in the US has cooled off from its peak last summer, while the series of Fed rate hikes in 2022 also cooled the housing market. A global downturn could prompt central banks around the world to reverse some of the hefty interest rate rises implemented last year.
The stock market wonders if things are getting better or worse. I think they will get slightly better in 2023.
India seems to be on a cusp of a very robust recovery with consumption, capex and credit growth leading to corporate profitability. Domestic demand-led India is likely to benefit given the tepid outlook for commodity prices.
As a fast-growing economy and given its demographic advantages, there is a good probability for India of receiving decent flows from foreign institutions, as the dust settles and new allocations start taking place. Indian retail and HNI flows have also been a force to reckon with and have provided cushion to markets in adversity. Sentiment, liquidity and fundamentals together will ensure that we outperform at least some global peers, if not all, this year as well.
Coming to the auto space, do you expect double-digit returns this year too?
The outlook for auto companies looks promising despite the near-term challenges of rising inflation and chip shortage. There is expectation of healthy demand in passenger vehicle (PV) and two-wheeler (2W) segment led by new products, increase in discounts and attractive financing schemes. While the chip shortage issue is expected to continue to hurt in the short-term, but it should gradually normalise over the next one-two years.
Original equipment manufacturers (OEMs) are investing in capacity additions, which would help reducing the demand-supply mismatch. Customer behaviour continues towards a premiumisation trend, with increasing traction of top variants in PVs and 2Ws.
Bank Nifty delivered more than 21 percent return in 2022. Will the banking space be a star performer this year as well?
The banking sector is likely to have a reasonably good strong performance in this calendar year. Powerful factors like credit growth or the asset quality are going to facilitate the sector’s outperformance. Of course, it will be dragged by things like rise in the cost of funds, given the valuation levels are also attractive. Asset quality for the sector continues to improve, aided by moderation in slippages, healthy recoveries, and upgrades.
The quality of earnings remained strong for most banks with a steady improvement in net interest margin, strong double-digit growth in core fee income, and lower credit costs. The strong improvement in domestic consumption has bolstered the private lender’s retail loan book. Apart from banks, select NBFCs, intermediaries and insurance companies look interesting beneficiaries of financialisation.
Do you expect the December quarter earnings season to be better than previous two quarters?
High-frequency indicators like peak power demand, recovery in air travel, sales of apparel, quick service restaurants, auto, housing, capital goods, GST collection, and pick up in capacity utilisation are positives. Rural India was adversely impacted in the first half, but we expect the situation to improve basis decline in inflation and a decent season for rabi crops. Most of these factors point towards a good earnings season.
Corporate India was adversely impacted during the last two quarters due to higher raw material prices resulting in decline in gross margins. Commodity prices have declined in recent times, we expect gross margins to improve from current levels. Hence, we believe that these factors support the corporate earnings growth momentum and provide cushion in case of a downside impact in a scenario where the world enters a slow growth scenario in 2023.
The upcoming Q3 earnings season is being watched closely for cues on the post-festive season demand trends and impact of the global slowdown. Banks have been the key contributors of incremental earnings in FY23. Gross margins for India Inc is expected to have bottomed out in Q2FY23 and sequential margin improvement is expected across sectors – mainly cement, autos, metals. However, it will be imperative to closely watch the body language, commentary and guidance of companies going forward.
Also do you think 2023 will be a great year for commodity markets?
Most of the commodities are cyclical in nature and it is very difficult to predict the trends in demand and supply plus the global linkages make it extremely challenging to form a long term view. We prefer businesses with robust balance sheets that can self-fund growth and are poised to withstand a potential recession in global economies, maintain resilience, and gain market share while their competitors’ lose. Return ratios, market size, market share, margin of safety, free cash flow generation and low or no levels of debt are important constituents of sound investment decision making.
Do you expect any significant announcement from the Union Budget 2023?
This is going to be the last full year Budget before the early 2024 general elections. Hence it is looked upon eagerly by the market participants. The FM will ideally strive to balance it between fiscal prudence, important reforms and being populist.
To achieve simplicity and bring efficiency to all categories of taxpayers, the government is likely to make changes to the tax rates and deductions. The growth trajectory of the FMCG industry is closely linked with trends in consumption demand. When consumers have more money in their hands, discretionary spending increases as do sales of FMCG products.
Sustained focus on infrastructure improvement, power sector reforms, ease of doing business, attracting FDI, incentivising manufacturing are on the top wish list.
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