In an interview with Moneycontrol, Naveen Chandramohan, Founder and Fund Manager of ITUS Capital, talked about the US debt ceiling, where Democrats and Republicans agreed on a deal in principle. "I do not see this affecting the markets from a structural perspective. It's one of the reasons I maintain that we are in a structurally high inflation regime here," he stated.
Following the fiscal year 2023 earnings, Naveen, who possesses over 16 years of experience in the financial markets, expressed his view that the FY23 earnings surpass expectations. He observed a significant and strong growth trend in sectors such as banks, capital goods, and auto ancillaries. Moreover, specific segments within the healthcare industry, such as hospitals and branded pharmaceuticals, have also experienced notable growth.
"I believe this puts us into FY24 on a strong footing with continued domestic capital flowing in," he said.
Q: What would be the impact of the debt ceiling on the equity markets?
Today, with the US debt to GDP at 135 percent and this number bound to go beyond 150 percent in the next 3 years, the rating agencies have put the country on negative watch.
We have seen this happen in 2011 too and I believe that Congress would provide an extension for a rollover. I do not see this affecting the markets from a structural perspective. It's one of the reasons I maintain that we are in a structurally high inflation regime here.
Q: Do you think the banking space may see subdued earnings growth going forward due to the high base? But is the space still on a strong footing?
The market has factored in a NIM (net interest margin) compression on banks starting Q1FY24. However, the loan growth in the banking sector is expected to continue around the 13-15 percent level. There would be certain segments like auto, CV (commercial vehicle), and capex-oriented loan book which could see a higher growth rate than the base rate I mentioned.
I would be underweight on banks today purely from a valuation perspective and own banks which have a skew towards the sectors mentioned earlier. So, bottom-up stock picking is going to be more important than staying significantly overweight the sector, in my view.
Q: What do you make out of the commentary by manufacturing companies after FY23 earnings, also especially related to China+1 related opportunities?
It's important to place some context on this question. In the mid-90s, the opportunity for IT services was the same for everyone in the sector. In fact, companies that had no background in IT set up separate divisions to scale their IT businesses. However, there were a handful of (<5) who scaled this opportunity.
Along similar lines, the question of the next leg of India’s GDP is clearly coming from manufacturing – this is fairly evident today. However, it's important to understand the right entrepreneur to invest behind.
As an investor, you would ideally want to allocate capital to companies that have a process / technical edge and a balance sheet that has a cushion to scale (with the right mix of internal accruals and debt). The commentary is clearly strong, and this is likely to continue and these are showing in the earnings too.
Q: Overall, we are near the end of the ongoing corporate earnings season. Are the earnings in line with your expectations?
I look at FY23 earnings as much better than anticipated. We have seen robust growth across banks, capital goods, and auto ancillaries. Specific parts of healthcare like hospitals and branded pharma have seen strong growth too. I believe this puts us into FY24 on a strong footing with continued domestic capital flowing in.
Q: Your take on earnings of consumption space, and their outlook for the year ahead?
The consumption space has seen a mixed outlook depending on the sector. For eg: QSR (quick service restaurant) as a category has seen inflation-led margin pressures, however, jewelry has seen robust volume-led growth.
Similarly, FMCG has seen better than expected (volume and price-led) growth and is expected to continue, whereas footwear has seen stagnation in volumes over a 4Y segment. It's important to look at the category-led growth today, rather than look at consumption as a whole as the growth is a lot more granular and micro. With rural recovery taking longer than expected, some of the rural-facing consumption has been tepid.
Q: Your view on the sectors that are on a strong footing for the next one year?
B2B manufacturing across auto ancillaries, CDMO (contract development and manufacturing organization) and businesses which have process-led efficiencies will continue to generate accretive growth. Specific consumption-led stories will continue to show a strong revival and the next year will be driven by bottom-up stock picking.
Q: Do you see value in electronics manufacturing companies in the coming years?
Absolutely yes, as there is a strong push towards localization of manufacturing here. However, I still do not see high margins in the business. Most of the volume-led growth coming through is driven by low-margin assembly and job work, rather than increased margins.
While we continue to study this space, and the growth numbers at a topline would be interesting, this is not something that we are excited about as investors.
Q: We have seen the highest monthly FII inflow since November 2022. Do you expect the flow to continue in India?
Today, the DII volumes continue to be strong. FII volumes are coming back after a year-long hiatus. While the central bank balance sheets have tightened globally, the flows into India continue to be strong. We are having multiple conversations with FIIs for an allocation to India and I believe this will only increase from here.
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