‘India in a sweet spot; current high inflation could be transient’

What is your view on the current market structure? Do you expect a fresh wave of buying or further consolidation?

The present market places India in a sweet spot notwithstanding the present high inflation which can be transient. 

Lower global GDP growth including China has put pressure on commodity prices and input costs which is providing a cushion to corporate earnings even as urban consumption slows and rural is slow to recover. 

Interest rates are also likely to remain higher for longer which implies that the markets may continue to witness valuation discipline and Growth at Reasonable price (GARP) may perform better in the current market structure. 

India’s above-par GDP growth rate, stable macros and strong balance sheets may continue to attract valuation premium. 

Risks to the above view would include crude prices (which can affect the macros) and/or any deviation from the consensus view on political continuity in 2024.

Did the Q1FY24 earnings meet your expectations? What sectors are you positive about after the Q1 results?

Banks, manufacturing and capital goods met expectations on growth and outlook even as there was some pressure on net interest margins (NIMs). 

Pharma was the surprise package with the pricing environment improving at the margin. 

While the topline growth especially in urban discretionary segments was slow, the margin improvement was almost uniform due to lower input prices

RBI has revised FY24 inflation estimates. How do you see the inflation trajectory unfolding from here on? When can we expect a rate cut?

CPI inflation for the month of July 2023 has come at 7.44 per cent, with food inflation at 11.51 per cent. Core inflation which excludes food and fuel inflation has come at 4.90 per cent. 

Food inflation is expected to come down due to supply-side measures initiated by the government. 

RBI forecast for the first quarter of 2024- 25 is at 5.2 per cent levels. 

Rate cut is possible, if CPI inflation over a one-year period comes closer to 4 per cent levels, which is the mandate of RBI. 

Rate cuts are not expected in the current financial year as RBI’s projection of CPI is above 5 per cent levels over a one-year period.

Can one take a contra bet on the IT sector at this juncture? What is the road ahead for the sector?

Interest rate hikes have not resulted in a recession in the US as was feared widely and hence raised the expectation of a soft landing. 

In addition, the deal wins have continued for the IT sector although there is a perceptible slowdown in revenue growth in FY24 for both large and midcaps. 

The period of low growth can extend especially if the interest rates stay up beyond 2023 and may have a lasting impact on economic growth beyond FY24. 

The sector, therefore, is unlikely to make a decisive turn in the short to medium term and likely to be driven by company-specific issues rather than a sector thematic. 

The long-term trajectory of growth for Indian IT typically comes back after a period of slowdown due to new waves of offshoring and/or new technologies in which the Indian IT services have demonstrated their capability.

What are some of the major factors that could influence the mood of the market in the medium term?

While India is enjoying the twin benefits of lower commodity costs and valuation premium due to higher growth, the risks could arise from global macros. 

In particular, the global inflation scenario and crude prices remain the key factors that could affect India’s cost of equity and hence the equity valuation (Nifty50 is trading at a forward PER of 19 times presently). 

Any major deviation in the electoral trends in the upcoming state elections will also need to be watched.

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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 22 Aug 2023, 12:31 PM IST