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In an interview with ETMarkets, Shah, with over 17 years of experience, said: “The underlying strength of Indian equities remains intact on account of visible CAPEX recovery, improving prospects of the asset quality of banks and various reforms undertaken by the government that started supporting economic momentum.” Edited excerpts:
Q) We started Samvat 2079 on a strong note. Do you think the worst is now priced in terms of geopolitical concerns, rate hike, inflation, etc?
A) The Samvat 2079 started on a healthy note, but we expect markets to remain volatile in the near term on deterioration in global macros and uncertainties prevailing in the western economies due to high inflation and likely rate hikes.
However, we believe that India would see a multi-year economic up-cycle amid stronger macros, the minimal impact of Covid, the ‘China plus one strategy, and various government initiatives in terms of schemes like PLI, localisation, grey list for import of critical items going forward.
Moreover, commodity softening, healthy Rabi crop led by a normal monsoon, inflation peak-out, and likely stable currency would support corporate earnings in 2HFY23. Therefore, we believe in the India story and remain constructive on Indian equities despite high inflation and rising interest rates. In the near term, the equity market may witness some pressure.
Q) How do you see valuation stack up when compared to other EMs?
A) Despite some moderation, the valuation of Indian equities is still at a premium. India has historically traded at a premium to the MSCI EM Index. This premium has increased recently.
Return-on-equity has also been at a premium to broader EM-supporting valuation. We expect its valuation to remain elevated, being an outperformer in economic growth and huge global opportunities ahead.
Domestic flows remained positive but have slowed down now amid a broader environment of rising interest rates and tighter liquidity with pressure on earnings.
Q) What is your take on the September quarter results which have come so far? Do you have more downgrades than upgrades in the forthcoming quarters?
A) The 2QFY23 earning season so far witnessed healthy revenue growth, but higher inflationary pressure took a toll on profitability as a majority of the companies witnessed margin pressure on account of cost inflation despite healthy revenue growth.
The upgrade and downgrade are tallied at 11% each, while we maintain ratings of 78% of our coverage companies in 2QFY23 so far. We increase earnings of 33% of the companies and reduce it for 61% of the coverage, while we maintain earnings for only 6% of our coverage universe for FY23E.
For FY24E, we reduce the earnings of 44% of the companies, increase them by 44% and maintain the earnings of 12%. In terms of the target price, we reduced our TP for 47% of covered companies and increased TP for 42% of companies while maintaining TP for 11% of companies under our coverage universe.
Q) Rupee has been all over the place. A lot has been talked about depreciation and appreciation. Where do you see the currency headed? And, does it also mean that firms with high Dollar debt will be under pressure?
A) The Indian rupee has fallen 12% against the dollar so far this year, while other currencies have depreciated more. The market fears that more rate hikes by the US Fed could again harden US Treasury yields, further weakening the rupee.
The INR has been weak due to both domestic as well as global factors. On one hand, Current Account Deficit and Balance of Payment are in bad shape, and on the other hand, an increasing marginal utility for USD has kept the local currency under pressure.
We expect further depreciation of the rupee before it stabilises over the next 2-3 months. Certainly, it would create huge pressure across firms having higher dollar-denominated debt. In a few cases, it may pose a challenge in terms of survival as well.
Q) Which sectors are you bullish on and why?
A) We believe that an all-around calibrated economic recovery is on the cards, though the timing remains highly uncertain. Sectors like engineering, capital goods, and EV ecology would continue to be in focus.
Financials would also continue enjoying positive traction. The automobile is also another promising sector on the back of likely demand revival, better supply, and commodity softening. For healthy economic recovery, capex revival by the government as well as by corporates is a must now.
Capital Goods: India is at the cusp of a capex revival, particularly in the capital goods sector. The government’s support through PLI and China +1 factors would further encourage manufacturing, going ahead. The sectoral outlook appears to be promising from a mid-to-long-term perspective, with huge opportunities coming from the various infra projects like the National Infrastructure Pipeline (NIP) with an estimated Rs111tn expenditure over the next five years and similar projects.
EV: We believe that the adoption of EVs will be a transformational change over the next decade, with an increasing focus on new EV launches by most OEMs. Moreover, the entire value chain development and EV ecology would provide ample opportunities to the various associated industries in the EV space. EV adoption is likely to be prominent in the 2W segment, followed by public mobility.
Automobile: It is also another promising sector as consumption spending-led demand revival would support volumes and profitability. Infra spending and likely pick up in construction activities would support CV sales, while ease on semiconductor supply, new product launches, and healthy order book would aid PV sales.
Financials: As the economy is on a revival path and demising impact of Covid on business, we have seen improvement in the business performance of financial sectors across banks/NBFC and financial support services. Moreover, during interest rate upcycles, this sector witnesses NIM’s expansion and improved profitability, which we expect to continue playing out in the next year also.
Q) If someone wants to invest, say Rs 10 lakh in Samvat 2079, what should be his/her portfolio asset allocation strategy and why?
A) Based on the current market scenario, its valuation, and global uncertainty, one can invest 30% in equities, 45% allocation to debt, and the balance 25% in commodities, including gold.
The underlying strength of Indian equities remains intact on account of visible capex recovery, improving prospects of the asset quality of banks, and various reforms undertaken by the government that started supporting economic momentum.
Q) What is your take on gold?
A) The underlying strength of Indian equities remains intact, and we believe the equity market will give more return compared to other asset classes over the long term.
Q) How should one play the small and midcap space?
A) We expect mid-cap to outperform strongly over the next year, investors should pick quality midcap with the lower dent and high ROE in the space of Engineering, Auto Ancillaries, Chemicals, etc.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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