"We believe the second quarter (Q2) ended September 2023 will not be significantly different from the first quarter (Q1) ended June 2023. We expect Q2FY24 to be flattish to marginally positive for technology stocks," said Rohit Agarwal, Executive Vice President & Equity Fund Manager at Kotak Mahindra Life Insurance Company, in an interview with Moneycontrol.
According to him, the IT deal pipeline remains robust, with companies still securing deals. However, implementation is experiencing delays due to current circumstances.
With more than 11 years of experience in capital markets, Agarwal is optimistic about the capital goods sector. He believes that the Government's increased focus on investment has gained momentum, and currently, public capital expenditure is in a very healthy state.
Q: Do you see more slowdown in quarterly earnings of technology stocks, after reading the first quarter numbers and commentary?
We believe the second quarter (Q2) ending September 2023 will not be significantly different from the first quarter (Q1) ended June 2023. Some margin levers will be offset by wage hikes and growth will be challenging as the deal ramp-up cycle continue to remain elevated.
However, it will be instrumental in setting the tone for the second half (October 2023 to March 2024) where there are still question marks around recovery.
We expect Q2FY24 to be flattish to marginally positive for technology stocks. The deal pipeline is still very healthy, companies are still winning deals, it’s just that the implementation of the deals is getting delayed due to the circumstances.
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Q: But, are the midcap tech stocks looking attractive?
Selectively, yes. Few of them have shown initial green shoots and are beneficiaries of a low base. We believe that higher revenue share from digital service offerings, improving metrics like low client concentration, better utilisation, and improving cash flows work in their favour.
Within midcaps, some of the companies have the capability to become large caps of tomorrow if they continue to deliver in the way that they have been in the last few years.
Q: Do you expect a big spending cycle globally once the end of uncertainties over the interest rate hike cycle?
We are not expecting a big spending cycle globally just yet. Even though interest rates are close to peak now and a pivot for the rates is pretty close, interest rates are not expected to get cut in an accelerated manner.
We are expecting interest rate cuts to be very gradual, a shallow rate cut cycle. We are currently not in the camp of rate cuts in the US for this calendar year. We expect the US Fed to gradually start cutting rates from next calendar year.
Q: Your take on the ongoing corporate earnings season....
The ongoing corporate earnings season has been a mixed bag as of now. Most of the IT bellwethers have reported numbers below market expectations. At the same time, companies in the banking and financial services space have declared numbers that have exceeded market expectations.
Although it’s too early to take a call on the corporate earnings for the quarter just started, earnings season is unlikely to see any meaningful cuts per se in market expectations for the full year.
Q: One sector that looks very attractive, especially after the current quarterly earnings season...
We believe that the capital goods sector still looks very good. The focus from the Government on the investment side has picked up momentum. Public capex is very healthy at the moment. Projects related to metro rail, airports, and roads have picked up across the country.
Even private-sector capex is starting to pick up in sectors like steel, cement and power. We are looking at a big capex cycle in India in the next few years.
Q: Do you think the worst of rural slowdown & commodity price pressure is over?
The worst of rural slowdown seems to be over. Given the rains in the month of July, barring some geographies, it now seems to be under control. This should lead to better rural demand in the second half of the year.
In the next 2-3 quarters there are quite a few states and general elections. This should lead to a good uptick in demand from rural India. Sowing has been good and demand from Rural India has already stopped decelerating giving confidence that the worst of the slowdown is now behind.
Commodity price pressure has eased up quite a bit. The commodities whose prices had gone up post covid and then due to geo-political reasons, they have already either corrected quite a bit or are correcting. Hence, the pressure on margins for the companies which use these commodities has started to ease. Some of it will be passed on so as to get better volume growth, rest will actually go back to enhancing margins.
Q: Your take on the Federal Reserve policy meeting... Also, do you see any possibility of one more rate hike in the rest of the calendar year?
The Federal Reserve just hiked the policy rates. Going forward, it suggested that any more hikes will be data-dependent. The US CPI print is already around 3 percent. We believe that there is a possibility of a maximum of one more rate hike in this calendar year and that will likely be the peak for the interest rates from the Feds. Thereafter, we expect an extended pause or a gradual softening of interest rates.
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