After reading March quarter and FY23 earnings, Kotak Mahindra Asset Management Company expects demand conditions as well as profit margins to improve as inflation moderates further, Harsha Upadhyaya, President & Chief Investment Officer - Equity says in an interview with Moneycontrol.
However, the real strength in the corporate climate is expected towards the latter half of the year, he believes.
Across funds, Kotak Mahindra AMC has significant exposure to the banking and financials sector. "The sector earnings growth was much higher than the market average levels during FY23, and we expect this trend to continue even going forward," says Upadhyaya, who has over two decades of experience across equity research and fund management.
Q: Are the gas stocks looking attractive now?
We believe volume growth rates can pick up which makes gas stocks attractive from current levels. All sources of gas have seen sharp price declines – spot prices have seen the steepest fall (from $50/mmbtu to $10/mmbtu), crude linked contracted gas and domestically produced gas have also reduced.
There will also be minor growth in domestic production expected this year which also augurs well for city gas companies as it provides comfort on domestic gas allocation without resorting to ad-hoc purchases in international spot market to meet end-consumer demand. This will be positive from their margin perspective. Valuations in the sector, which generally has seen healthy return ratios, remain attractive.
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Q: Do you think the margins have peaked out in the banking space, though there are expectations that the sector will continue to do well?
Higher credit–deposit ratios, and faster loan re-pricing were the key drivers for net interest margin (NIM) expansion over the last year. Now it does appear that we are to peak NIMs. However while NIMs would likely stabilise or moderate from here on, it would be gradual.
Deposit growth is gradually picking up but lags credit growth which remains strong. Banks with higher CASA and retail deposits along with higher floating rate loan book (MCLR) are better placed wherein some degree of re-pricing is still pending.
Q: Your take on March quarter earnings? Have you seen more positives than disappointments?
March quarter earnings until now have been broadly in line with expectations. 44 companies out of the Nifty basket which has announced results so far, have seen nearly 20 percent year-on-year earnings growth – a beat of 3-4 percent over expectations.
However, the performance of mid and small caps still are lagging compared to that of largecaps.
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Q: As we are near the end of March quarter earnings, what do you broadly expect for first quarter of FY24?
We expect demand conditions as well as profit margins to improve as inflation moderates further. However, it is likely to be a gradual one rather than a sharp improvement. Real strength in corporate climate is expected towards the latter half of the year.
Q: One sector that must be a part of portfolio, especially after FY23 earnings?
Across our funds, we have significant exposure to Banking and Financials sector. The sector earnings growth was much higher than the market average levels during FY23. We expect this trend to continue even going forward.
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Most banks have seen improvement in ROEs (return on equity) over the last 3-4 years while valuations remain at or below long-term averages, leaving room for improvement.
Q: Is the equity markets reasonably valued now? If yes, then what are the factors (global or domestic) keeping the market away from record highs?
The large-cap basket is currently trading at around fair range of valuations based on Nifty 1-year forward P/E multiple of around 18.3x. However, the mid and smallcap segments are still trading at relatively higher valuations than the large-caps.
For higher levels in the market, we need to witness – greater visibility of strong corporate earnings growth, moderation in global macro concerns and a larger flow of funds into the market amongst other things.
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