3 sectors likely to outperform & 3 that may underperform now: Shibani Sircar Kurian

FY23 will be a year of bottom up stock picking. This year, in terms of navigating the market unlike the last two years where we saw market movement being largely broad-based, is going to be more stock specific in nature and in the near term, we will have to contend with volatility, says
Shibani Sircar Kurian, Senior EVP, Fund Manager & Head -Equity Research, ESG Coordinator,
Asset Management.

What do you make of the choppiness and volatility in the markets? The undertone of the market continues to remain negative. Do you believe this will continue for some more time to come?
Yes our belief is that for some time we would have to contend with volatility and therefore we continue to remain cautious in the near term. Hopefully, by the second half of this financial year, things would stabilise, especially on the global front and that could lead to some amount of focus shifting back to long-term earnings.

Let’s look at it from two angles – in terms of earnings and in terms of valuations. We have just completed the Q4 FY22 earning season. Earnings have held up fairly well and there have not been any major downgrades at a headline level. However, we do believe that Q1 of FY23 will be the quarter to look out for because a lot of the margin pressure because of higher input costs will likely manifest itself and we will have to watch out for earnings estimates at a headline level for Nifty.



The second aspect to look at in markets is valuations. Now valuations have come off in absolute terms, however, if we look at relative valuations, India typically trades at a premia to emerging market countries but the premium that India is trading at even despite the correction continues to be higher than long-term average multiples.

Therefore valuations are still not at levels which make India very attractive in a relative context. We are also seeing from a market perspective that while headline valuations are not cheap, stocks have clearly corrected and our belief is that FY23 will be a year of bottom up stock picking.

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We are looking at those companies which have price leadership, companies which are market leaders and therefore have the ability to take price hikes to pass on some of the input cost pressures. We are clearly focussed on balance sheet and cash flows and companies with low leverage and where valuations are reasonable.

So this year, in terms of navigating the market unlike the last two years where we saw market movement being largely broad-based, is going to be more stock specific in nature and near term we will have to contend with the volatility.

What is the next thing to watch out for, what are the triggers that you have on your watch list?
In the global context, what is happening in India is there have been three key factors that have impacted markets. One, of course, the Russia-Ukraine crisis and the impact on inflation and rates which is now fairly well known.

The second factor to watch out for is how the global growth trajectory really moves. There are fears of a possible recession in the US and this comes at a time when the Fed is tightening and has started its entire liquidity normalisation process and therefore global growth outlook is going to be one key factor to watch out for.

The third factor and this is more domestic in nature is the trajectory of earnings. As we were discussing, we have just come off a cycle where earnings were getting upgraded every quarter. However, we believe that near term, we will have to watch out for earnings, especially in the first and second quarter of FY23 because most of the impact of higher commodity cost in terms of margins will possibly be visible at that point in time.

Therefore companies will really have to walk a fairly thin line in terms of passing on the input cost pressures and also managing demand and that is the other key factor that we will really have to watch out for going forward.

Where interest rates are concerned, remember we are at the start of the interest rate cycle. Inflation will possibly remain elevated where India is concerned at least in the near term before starting to moderate and therefore the pace at which RBI hike rates will also be the fourth key factor for us to watch out for from the market perspective.

But in the rate upcycle, banks is one space which has historically managed to show quite a bit of resilience. If that theory has to play out, this time around which are the stocks or the top sectoral bets that you would like to take within the entire financial pack? Will it be the PSU banks, private banks? Any names that stand out to you?
Typically we have seen that a rising interest rate scenario at least in the initial part of the cycle, banks tend to benefit because of higher margins. Now we see that a significant portion of loan books of banks are linked to external benchmarks like say repo. So as the repo rate is hiked, we will possibly see higher lending rates.

The Other factor is that credit growth has started to improve in the system. Credit growth is usually linked to nominal GDP growth and as nominal GDP growth is moving up, we are also starting to see incremental signs of credit pick up.

In this sort of a context, we are clearly seeing that the private sector banking pack. especially the larger banks, are able to grow faster than industry and therefore the market share gains that we have seen for these banks over the last decade continues. Also remember that as loan growth picks up, focus shifts towards liabilities and therefore banks which have a strong deposit franchise or liability franchise, which have a larger proportion of low cost deposits will be in a better position to fund the loan growth.

In the last two years, during the Covid period, a lot of focus was on asset quality, credit cost and now the focus has shifted towards growth and liabilities. In this context, we believe that the larger private banks are much better placed. They are able to grow both loans and deposits and gain market share. They are well capitalised and they are also earning return ratios which are superior to some of the others in the sector and valuations remain fairly comfortable. So from an overall sector perspective, we are positive on larger private banks.

At this juncture in this current market scenario, with so many moving parts, what is on your outperform and underperform list?
We remain fairly positive on three key sectors.. One, is financials and specifically within that, the private sector banking pack. This is a sector where we believe valuations relative to the return ratios and ROE profile remains fairly attractive.

The second segment for us is industrials, manufacturing and infrastructure. We do believe that notwithstanding pressures on the fiscal side the overall public capex push will continue and therefore policy focus on infrastructure is likely to continue for a period of time and therefore we believe that growth in the manufacturing industrial segment would continue. This segment is also benefiting from supply chain shift away from China. If we look at core industrial growth and the numbers in terms of order flows, clearly growth is starting to resume especially where industrial consumables are concerned. There is a tailwind in terms of policy focus from the atmanirbhar Bharat scheme as well. So overall, the manufacturing industrial space continues to remain attractive.

The third area where we are positive is the chemical space. The valuations may not be as attractive as it was a couple of years ago. However, we believe that the runway for growth in chemicals, especially where speciality chemical is concerned, is very strong and therefore growth could continue to surprise positively.

India is clearly benefiting from supply chain shifts away from China and we believe that India as a country will continue to gain market share and companies are also setting up incremental capacities to benefit from this growth. These are some of the key sectors we are positive on.

As for segments where we are slightly negative and cautious, one on the metal side is ferrous. We believe that global growth is slowing down and China growth is being impacted in this current environment. So the kind of up move that we have seen in terms of steel prices will possibly come to an end at least for the time being and therefore ferrous is a segment we are slightly cautious on.

Apart from that the other space where we believe valuations are still elevated is the midcap IT space. Here stocks have corrected 30-40% but we believe that compared to historical averages, valuations continue to be elevated and therefore we prefer largecap IT over midcap at this point in time.

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