Daily Voice | HDFC Securities tad more conservative than RBI on FY24 growth, says Varun Lohchab

Varun Lohchab is the head of institutional research of HDFC Securities

HDFC Securities expects India’s GDP to grow at a lower 6.3 percent against the Reserve Bank of India’s forecase of 6.5 percent this financial year, says Varun Lohchab, who is the head of institutional research at the brokerage firm.

Growing geopolitical tensions, volatile financial markets and uneven monsoon at home are some of the risks facing the Indian economy, says Lohchab, who has 18 years of experience in Indian equity markets across leading firms such as Fidelity, Franklin Templeton and Jefferies.

In an interview to Moneycontrol, Lohchab says he is bullish on real estate and building materials space on the government's continued infrastructure push and the growing demand for housing. Edited excerpts:

Do you expect FY24 growth to be below the Reserve Bank of India's forecast of 6.5 percent?

We are a tad bit more conservative with our GDP forecast for FY24 than the RBI; we expect the growth rate this year to be 6.3 percent. Our estimate factors in potential downside risks to the economy such as geopolitical tensions, volatility in global financial markets, global trade slowdown, and uneven domestic monsoons.

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Head of Institutional Research|HDFC Securities

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Do you think inflation can fall and stay below the 5 percent mark this financial year?

We are currently pencilling in 5.4 percent as our FY24 inflation estimate. The primary upside risk factor to inflation is higher crude prices as a result of escalating geopolitical tensions in the Middle East. Furthermore, we remain cautious regarding core inflation as demand conditions continue to hold up and service sector activity remains strong.

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Are you cautious about the globally-linked sectors?

Rising interest rates led slowdown in global growth and decelerating trends in global trade make us cautious regarding globally-linked sectors such as IT & chemicals. The IT sector, which is considered to be led by discretionary expenses of corporates, is already feeling the pinch of their customer's cost rationalisation actions.

Further, inventory rationalisation by global agrochemical companies and weak demand for products from the US and Europe has led to a correction in the prices of finished products. This is dampening the prospects of domestic chemical companies.

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We expect these export-facing industries to continue facing tepid demand this year as global economies wrestle with higher-than-usual interest rates. Hence, we remain underweight on chemicals & IT. That being said, we are positive on pharmaceuticals that cater to non-discretionary expenditures and should be relatively insulated from a global growth slowdown.

Which do you prefer — the building material space or the real estate segment?

We are fundamentally bullish on both these sectors as the tailwinds for these sectors as strong as ever. The government's continued investment in infrastructure development and the growing demand for housing in a rapidly growing working class bode well for both these sectors.

However, from a stock selection perspective, we currently prefer the real estate space over building materials, primarily led by relative valuations. Valuations in pockets of the building material space seem stretched to us, indicating an unideal entry point for most of the stocks in this segment.

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Which are your overweight themes?

The two themes we are overweight on are investment-led growth in India and the financialisation of household savings.

The investment-led growth in India, which is manifesting itself through higher public and private sector capex, bodes well for the industrial and capital goods sectors. The stocks in these sectors have run up a great deal over the past few quarters as current earnings and future earnings expectations have been propelled by the ongoing capex cycle in the economy.

Additionally, the financialisation of household savings is a byproduct of a more financially educated and aware working population of the country. Pooled fund investment vehicles (MFs, PMSs etc) have now become a promising alternative to bank deposits, and the growing AUM figures of money managers are indicative of this trend. Capital market stocks are expected to be continued beneficiaries as this theme continues to play out.

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While we are positive on the industrial, capital goods, and capital market industries, it must be highlighted that bottom-up analysis is required while picking stocks in these sectors, as many names are currently trading at expensive valuations. While there is a structural story being played out in the space, it is not prudent to enter these stocks at all levels. Investors must either look for value picks or be patient and wait for valuations to correct.

Do you think the worst is over for the IT space? What do you expect as IT companies lower their full-year revenue guidance?

While we believe that the IT sector's performance has likely bottomed out, recovery from these levels is not expected in this fiscal year. Many of the tier-1 IT companies that have reported results, so far, have lowered their full-year guidance and subsequently, the FY24 EPS consensus figures have seen modest cuts. Growth in most European nations has already started decelerating and the expectation is for the US to follow suit as interest rates stay higher for longer.

Furthermore, the discrepancy between the IT companies' order books and their billed revenues indicates that clients have been postponing their planned IT projects. With such a backdrop expected to loom over for the next 12-18 months, earning growth visibility in the sector is relatively low.

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