The Indian IT sector has seen more than 30 percent correction from its high in the last couple of quarters, especially after a fabulous run since the Covid days. The IT services now see a sequential moderation in demand but the long-term demand for IT stocks remains intact.
IT services, however, will see a revival to normalcy in demand over the next two to three quarters, while some more cooling down in valuation would make large-cap IT stocks even more attractive, believes Anil Rego, Founder and Fund Manager at Right Horizons PMS.
Automobile is another sector revving up to investor expectations. The auto space has been the biggest gainer for more than three-and-a-half months and trending upwards on the back of a revival in cyclical demand in most categories. In an interview with Moneycontrol, Rego shares how he expects the rally to continue as the demand momentum is likely to sustain.
Excerpts from the interview:
Considering the current weak sentiment and volatility, do you expect another deep correction in the market in the coming weeks?
The Indian equity market is likely to be volatile over the next two quarters, primarily due to recessionary fear and demand slow-down. Also, destocking across various sectors could lead to a volume contraction, even as raw material prices have normalised in the last quarter. However, we are hopeful of pent-up consumption supporting restocking from the third quarter of FY22.
Oil prices corrected sharply in recent days despite ongoing geopolitical tensions. Is the likely recession in the US causing this correction or is it just a temporary phase?
Fear of recession has led to the unwinding of futures and the slack in demand from China has led to lower prices, however, the current balance between supply and demand is unreliable, and prices may continue to be volatile in the short term. However we expect mismatch in supply and demand in the oil market to ease-off by end of this financial year.
As we see a possibility of earnings downgrade, do you think the market has already priced in or it will react on actual earnings downgrade? Also, what are your thoughts on earnings downgrade and expectations for FY23?
Earnings were downgraded earlier as the central bank started to raise interest rates, and commodity prices were soaring among other factors, which was factored in by the markets to an extent, further downgrades are possible in Q1FY23, however, earnings for FY23 from selective quality companies with strong business model could surprise the markets on the positive side.
The biggest gainer in last three-and-a-half months is the auto space. Is the rally coming to end in auto space?
The auto sector has been trending upwards due to a revival in cyclical demand in most categories, hinted by June 2022 sales number, ease in supply constraints going forward, and improvement in margins due to the steep descent in the steel and other metal prices. We expect the rally to continue and are positive about the sector for the long term as demand momentum is likely to sustain.
Do you think the IT space has priced in all negative news and is ready for up-move?
Indian IT space had a robust performance in FY22 due to strong demand. Margins took a hit in Q1 as employee expenses and traveling for IT companies came as a surprise. Its services demand witnessed a sequential moderation, however, we expect this to normalize over next two to three quarters. Long-term demand remains intact and further valuation cool-down for large-cap IT companies would make it really attractive.
Given the less impact of war on Russia and having a good India's relation with Russia, do you think Indian companies have a great opportunity to establish their presence in the world's second-largest oil exporter?
Indian companies are likely to benefit since Russia's access to markets has been limited since its invasion and sanctions imposed subsequently, however, the process is complex and requires funding from both the governments and the corporates.
Furthermore, it usually takes a decade for the infrastructure to be set up, so we don't see positive impacts from this in the medium term. Besides Indian companies have already benefitted due to China+ 1 strategy and government policies benefitting sectors like manufacturing, textile, durable consumer goods, etc.
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