"The Union Budget FY23 would be a net growth budget with manufacturing as the cornerstone," Divam Sharma of Green Portfolio told Moneycontrol in an interview.
He believes that infrastructure creation should be a priority for the government. If we were to solidify India's position on the map as an alternative to China and a major manufacturing destination, the focus on energy, logistics, roads, railways, and ports should be on the priority list, says Sharma.
On the IT space, the founder of Green Portfolio, who has over 13 years of experience in investment management in stock markets, believes the IT sector could see some more pain in the coming year as the developed countries face recession fears and as liquidity gets squeezed out of the system. Edited excerpts:
What kind of major announcements do you anticipate by the Finance Minister in the Union Budget 2023?
We expect this to be a regular pre-election budget where the focus will be on manufacturing and spending for the masses. The capex and growth narrative underlined in the previous budget will roll over the ink towards this budget.
Despite ‘Make in India’, several announcements and initiatives like the PLI scheme, the manufacturing sector’s contribution towards our GDP remains below 15 percent. The ministries realise this, and the opportunities glaring at India. Hence, this would be a net growth budget with manufacturing as the cornerstone.
We believe that infrastructure creation should be a priority for the Government. If we were to solidify India's position on the map as an alternative to China and a major manufacturing destination, the focus on energy, logistics, roads, railways, and ports should be on the priority list. This will foster further corporate capex and will ensure a higher GDP growth for the economy in the years to come.
Are you bullish on the healthcare space now?
We are selectively bullish on healthcare. Valuations have climbed recently, and several names seem too expensive for our taste – doesn’t fit into our screening process. Nonetheless, we have a minor exposure to this sector. Other sectors that were overlooked during the last 2 years are where we are finding the utmost potential upside and this is where we reside today.
Considering India is the most expensive market among Asian countries, do you see 5-10 percent correction in Indian equities in the coming period; or do see Nifty getting back to the 20,000 mark in the second half of 2023?
A 5 percent correction will not be surprising at this juncture. We have seen several of our portfolio holdings and indices climbing ahead of the budget. If history were a teacher, 4 out of the last 5 times, we have seen a correction post the budget. On any major corrections, we do not foresee one as long as oil prices remain below $100 a barrel. These are short term expectations, and we aren’t overly concerned about these.
India is going to continue commanding a valuation premium among the emerging market (EM) space. To attach numbers to this, our Nifty benchmark is trading at a P/E multiple of 21x while the MSCI Emerging Market index is trading at 13x. As we see interest rates reaching their peak, we would see reallocation of capital towards risky asset classes i.e. emerging market equities and India.
Despite the recent noise on FPI/FII’s withdrawing, they are bound to come back. India will continue to attract a higher allocation amongst EMs. Our domestic flows continue to be robust as of now.
If you look at valuations in the broader market – the mid and small cap space, we observe several under the radar companies available at a really attractive price.
What do you make out of the commentary of IT biggies which announced quarterly earnings this week? Are you a buyer in this space?
We have been underweight on IT for a year now. We still see uncertainty around order flows, attrition and valuations as a concern. Our exposure in our main fund towards IT is zero. If valuations were to become attractive among small and mid-cap companies that we forecast to grow at a 30 percent+ CAGR, we would be open to this space.
We could see some more pain for the sector in the coming year as the developed countries face recession fears and as liquidity gets squeezed out of the system.
Do you expect any kind of downside risks to expected double-digit earnings growth?
In the short term, yes. Inflationary pressure impacting demand and margins; supply chain bottlenecks; stress in rural markets; and fall in exports because of an impending recession can impact the real growth in earnings.
Most if not all companies that we are investing in are backward integrating and establishing their own power source to avoid energy disruption. Management commentaries from these companies remain robust. Owing to several other positive factors and India’s macro indicators we do not see a downside risk to earnings in the long run.
Do you think one should start buying in oil marketing companies which have seen a good run-up in the recent past?
We are not bullish on OMCs. US reserves are being depleted, China is reopening, war is still ongoing, cap by the government on retail prices, and several other factors feed into the ‘oil price’ equation. This is not exclusive to the year 2022 or 2023, but pervasive across decades.
Hence, oil will remain volatile in the coming periods which will result in losses for these companies. We aren't comfortable investing in companies with a myriad of uncertainties and where cash flow is dependent not on management talent but geopolitics.
Do you expect the margins to hit peak in the fourth quarter of FY23?
Yes, we see margins bottoming out as inflation decelerates, especially for many pharma and chemical names that felt the wrath of supply chain bottlenecks and high commodity prices. We see the trend of fall in inflation to continue for some more months before it starts moving up.
Q4 inflation prints will be relatively small compared to what we witnessed in the last three quarters. We are now in a phase where we would see high average inflation numbers over many years as the Central Banks would target a high nominal GDP growth rate.
This volatility in commodity prices will negatively trickle onto the margins in the long run. The potency of the impact on margins will depend on how companies can manage this - how well-hedged they are, backward integration abilities, and management proactiveness.
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