Shailendra Kumar of Narnolia Financial Advisors
Looking at strong domestic trends, during the current correction, Indian auto stocks that have lower global exposure look attractive for investments, Shailendra Kumar, Chief Investment Officer at Narnolia Financial Services says in an interview to Moneycontrol.
Among auto stocks, with growth-in-value investing style, he believes commercial vehicles and passenger vehicles are looking strong, while the global market remains uncertain for exports for two-wheeler companies.
In terms of absolute valuation, after the current sluggish phase where the Nifty for the more than 18 months has traded sideways around similar levels, Indian markets are attractive for investments now, says Shailendra with over two decades of experience in the space of fund management and investment advisory.
Do you think the quality of earnings has been falling? Also do you expect Nifty EPS to be lower in coming quarters?
Indian corporate earnings over the last four quarters have consistently been below expectations on account of a series of cyclical issues. While aggregate print is still decent enough the bigger problem had been in terms of breadth. Different sectors have behaved very differently in the recent past.
Commodity price volatility that got triggered after Ukraine crisis broke out is the key issue here. While last year March, June and September quarters saw poor numbers from consumer stocks due to higher commodity prices. During the December quarter, while commodity and cyclical stocks have seen compression in the margin owing to falling prices, consumer stocks too saw lower profit growth due to inventory write-offs.
Banking stocks were the lone consistently outperforming sector all through the last four quarters. Also, the last two quarters have seen improvements in consumer discretionary.
Nifty EPS a year back was expected to be higher in FY23 by 18 percent but will finally be closing with 12 percent YoY growth. More importantly, Nifty EPS which was expected to be in four digits by FY24 will do so in FY25 only.
Do you see any possibility of earnings downgrades for banks as Bank Nifty has corrected 8 percent from its record high?
Banking stocks have consistently declared their results above expectation all through the last four quarters on account of higher net interest margin (NIM) and lower credit cost. Going ahead while credit costs will remain benign, the risk will come from NIM compression.
NIM for the Indian banking sector is at multi-quarter high, banks have been able to pass on the interest rate hikes to borrowers but the same has not been done to depositors to the same extent. But as credit off-take remains strong and deposit growth is lagging course correction will take place during the next financial year.
Your thoughts on key global commodities and possible impact (positive or negative) on earnings.
Volatile global commodity price played havoc with the Indian business landscape last year and was the key reason why Indian corporate earnings suffered and thus the stock prices. But I think we have entered back into a benign commodity price regime.
Towards the end of 2022 and the beginning of this year, commodity prices were firming up with expectation of China opening up but the rally in commodity prices has completely reversed during the last month. This is structurally good news for aggregate corporate margins in India going ahead.
Do you think overall auto stocks have seen enough correction considering the current global and domestic environment?
Among auto stocks, commercial vehicle (CV) and passenger vehicle (PV) are looking strong. Domestic market in terms of volume has yet to surpass numbers during the previous cycle peak made in 2018 but due to sharp pricing increase companies in CV and PV are seeing higher revenue numbers.
Also, most of these companies have consistently raised their margins. Demand also looks robust looking at current bookings. At the same time, the global market remains uncertain for exports for two wheelers companies. But looking at strong domestic trends, during the current correction Indian auto stocks that have lower global exposure look attractive for investments.
Do you think the equity market still looks expensive at current levels?
As investor we need to remember that good time and good price never happen together. The current cyclical slowdown in Indian corporate earnings and more importantly current bad sentiments and flows is a great time for investing. In a structural sense, Indian macros are in great shape. Also with a series of positive steps undertaken, Indian companies’ earnings capability is continuously improving.
We are the fifth largest economy in the world but on a per capita basis we rank below 150. And till India does not achieve per capita income above $ 10,000, our search for growth will continue. With favourable demography and multiple positive structural changes happening in the economy, we are set to achieve these targets in the years to come. And this remains the basis for investing in Indian equities on each and every cyclical decline.
On a relative valuation basis too, India has always commanded a premium to other markets due to high growth, and diverse sectoral opportunities and will continue to do so. In terms of size, we as an economy rank 5 and so is our stock market capitalisation right now. In terms of absolute valuation post the current sluggish phase where Nifty for the past more than 18 months has traded sideways around similar levels, Indian markets are attractive for investments now.
Do you advise investors to go for fixed income, instead of equity, at this point in time?
It is not about fixed income versus equity rather fixed income along with real estate, gold and equity should always be part of one’s investment portfolio. The percentage of allocation can differ based on market outlook and other risk related factors. In terms of interest rate, I think we are in a ‘higher for longer’ kind of regime right now.
In terms of yield, there are multiple safe, fixed-income options that can give around 8 percent annualised return this year. But further capital gain opportunities due to fall in interest rate going forward may not be a valid opportunity in this calendar year.
Your thoughts on Q3FY23 GDP numbers announced on Tuesday.
The third quarter GDP in absolute rupee terms has come in on the expected line; small disappointment in percentage terms is on account of upward revision in previous year numbers. What continues to be a bit worrying is sustained slower growth in consumption.
Backed by higher investments FY23 nominal growth stays above 15 percent which is positive. Important will be to see how inflation plays out as that will be key to when consumption growth will come back.
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