Manish Sonthalia, Head Equities - PMS, Motilal Oswal Asset Management Company believes IT and pharma will continue to outperform and these sectors along with banks and metals will drive earnings growth in the second half of the current financial year.
In an interview with Moneycontrol, he said FPIs will come back to the Indian market after vaccination picks pace. Edited excerpts:
Q) Nifty has hit an all-time high level. What is giving comfort to the market? Can we see a correction from hereon?
A. Markets are at an all-time high and there is more room for upside as 1) FY21 has seen roughly 15 percent EPS growth on the Nifty stocks in spite of it being a pandemic year; 2) FY22 is going to be even better in terms of EPS growth compared to FY21 even after seeing a second wave and it’s going to be more broad-based corporate recovery this time around; 3) plenty of liquidity around; and 4) low cost of capital will keep valuations elevated.
Q) Do you think inflation can spoil the party? How big is it a risk for the market at this juncture?
A. Inflation is not a material risk at least for the next 6 months. Beyond that, we need to see how things play out. Reasonable inflation (4-5 percent) is fine with markets.
Q) IT and pharma sectors have been dominating other sectors. Do you think these sectors are overbought now? What would you recommend - buy/sell/hold for these sectors?
A. To beat the slowdown, corporates will need to leverage technology. The spending on digital, the growth in hyperscalers, the large transformational deal sizes are pointing towards growth in IT beyond FY22, FY23 and FY24.
Valuations are mid-cycle valuations and hence may look elevated but are actually not if you take the entire cycle into perspective.
Decent IPM (Indian pharmaceutical market) growth, new product launches in exports, vaccines and China+1 (China and beyond) strategy will keep the sector excited for some more years.
There will be earnings growth coupled with valuation expansion hence remain positive on both these sectors. These sectors should outperform going forward as well.
Q) What sectors will lead the earnings growth in the second half of FY22?
A. Banks, metals, IT, pharma, housing real estate, building materials and autos should drive earnings growth in the second half of FY22 (H2FY22).
Q) Data shows FPIs have been selling Indian equities in May. Do you think this trend may continue or FPIs will come back to the Indian market?
A. FIIs have been concerned that there has been a second wave in India and not more than 2 percent of our population have been vaccinated so far. Perhaps that’s the reason why they have been selling.
As the percentage of the population getting vaccinated goes up over a period of time, I think this outflow that we have been seeing may convert into inflows.
Q) Cyclical or growth stocks- what is your favourite?
A. I have a blend of both quality growth stocks as well as cyclical stocks to optimise returns in the portfolio.
In any case, there is an element of cyclicality in all sectors. So quality growth stocks will also have an element of cyclicality.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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