India is in throes of an earnings readjustment because of the near-term headwinds, says Aditya Sood of InCred PMS who expects earnings for the Nifty50 to grow at 15 percent and 12 percent for FY23 and FY24, respectively.
He believes since India is now trading close to the long term average earnings growth trajectory would support market levels.
It is time for the market to focus on management commentary and FY24 outlook and take investment decisions accordingly, says the Head Portfolio at InCred PMS in an interview to Moneycontrol.
Are we done with the run up in auto space or the good days are yet to come for the sector?
There are a host of factors that have germinated over the last couple of years that have had a significant impact on the auto sector. Firstly, there is the transition from BSIV to BSVI. Then there were financing and affordability-related issues stemming from the NBFC crisis and Covid impacting personal mobility. And finally, during and after the pandemic, chip shortages impacted supply.
However, today we stand at a juncture where many of these concerns are getting assuaged and a significant amount of pent up demand is waiting on the sidelines, ready to hit the market.
Keeping that in mind, we believe that there is significant potential for volume recovery across passenger vehicles (chip shortage is now easing off and new launches are driving the replacement cycle). In the commercial vehicles space, it is expected that cyclical recovery would be aided by strong macro and improving fleet utilization levels in the coming years. On the other hand, in the 2-wheeler space, recovery is expected to be gradual with marked recovery contingent upon an improvement in rural demand.
Further, one can also expect margin tailwinds in the sector considering the meaningful correction in commodity prices like steel, aluminium, etc., which are down 20-25 percent over the last 2 months. While profitability at most original equipment manufacturers (OEMs) is currently below average, we expect normalisation ahead. Additionally, valuations are reasonable at the current juncture and a mean reversion is imminent.
Do you see the current correction as an opportunity to pick up quality stocks? Any themes that you would suggest investors?
We find ample opportunities to invest in the market in sectors and stocks which either have seen a sharp correction over the past year or have point-to-point negligible returns on a 3-5 years basis. Further, there are several quality stocks that have seen compression in multiples and now, after a period of correction, these are available at reasonable valuations. Such companies can prove to be compelling investment opportunities.
More specifically, we think that pharmaceuticals as a sector have witnessed a sharp correction and quality stocks in the sector are available at compelling valuations. Additionally, while multiples in the IT sector are not cheap, we do believe that there are selective opportunities in the space given continued strength in demand.
After disappointing period for the market in last nine months, do you think the market will return to the peak levels again?
Rising inflation and interest rate hikes by various central banks have impacted market sentiment which has led to heightened volatility. With the risk-free rate having increased in the recent past, the narrowing gap between earnings yield and bond yield has impacted market valuation multiples. We are currently in the phase of earnings readjustment on account of the near-term headwinds. We expect earnings for the Nifty50 to grow at 15 percent and 12 percent for FY23 and FY24, respectively.
Considering the multiple headwinds, market valuations have witnessed a significant correction in the recent past, dropping from a consensus estimate of 23x earnings to 16.5x FY24. More importantly, this is a 10 percent premium to the long-term average.
Since we are now trading close to the long term average earnings growth trajectory would support market levels. It is time for the market to focus on management commentary and FY24 outlook and take investment decisions accordingly.
Is there any possibility of big FII inflow in later parts of the year after nearly Rs 4 lakh crore of outflow in last nine months?
Investing in emerging markets is a call on currency volatility, regulation and geopolitical stability, and the size of the opportunity. If you look at the current global landscape, you will observe that there are certain countries like Turkey and Russia that witnessed enhanced currency volatility. Then there is a country like China wherein the policy environment has been challenging across many industries. And then there is India which ideally checks all the boxes for a global emerging markets (GEM) investor.
It is important to note that during and in the aftermath of the pandemic, the Indian economy has been fairly resilient. This is primarily on account of software exports being in line with the crude oil imports, unlike the FY12 period when crude was at $100 a barrel. Hence, we believe that India is well-positioned to command a higher weight in the MSCI EM index over the medium term.
Accordingly, we have positioned our portfolios to benefit from the FPI flows turning positive after a sharp sell-off over the past 12-18 months.
Do you think the premium that India enjoys compared to emerging markets will stay above long-term average in the coming years?
India has traded at higher valuation levels than other emerging markets for years and its current valuations are high again, following the recent outperformance. However, over more than 20 years, the MSCI India Index has outperformed the MSCI EM Index by 2.3 percent annualised despite these high valuations.
India's premium relative to other emerging markets is a function of the superior profitability profile of Indian companies and superior ROE (return on equity) profile vis-à-vis emerging market peers.
We believe that India’s market premium is supported by powerful demographic trends, increasing urbanisation and rising wealth, export growth, geopolitical tailwinds, and an enabling policy regime. These factors are coalescing at a time when the corporate deleveraging cycle of the last few years is coming to an end and as India enters into a new upcycle in corporate profitability.
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