Daily Voice: Here's why this portfolio manager thinks time is right to invest in IT space

Considering the current policy rates, expected GDP growth rate, and the inflation numbers, there is no obvious case for a rate cut from the RBI on a standalone basis. However, the domestic policy rate outlook is expected to be impacted by the US Fed rate action, where we expect Fed to undertake three rate cuts in 2024.

While the RBI has significant flexibility, given the strong Indian economy and moderate inflation conditions, we expect at least one rate cut this year, considering the currency impact of a US rate cut.

The outlook for IT companies remains uninspiring. Should one stay away from the space?

We have a contrarian view on the IT sector and believe that the current slower growth outlook by the IT firms is a short-term concern. The long-term opportunity is still extremely strong, and even the mid-term outlook is strong with high single-digit growth possibility. This is a reasonably low entry point to capture good free cash flow yields of 4-5 percent across the IT services space.

We expect the near-term growth outlook to improve by the latter half of the current fiscal. Apart from the digital transformation initiatives, we see GenAI as a big opportunity for the IT firms.

At the enterprise level, commercialising the use of GenAI involves cloud migration, building the data foundation, updating enterprise platforms and processes to use GenAI in business processes and finally having the right security foundation and talent pool to support this. All these activities create large opportunity pools for the IT firms.

Are you bullish on industrial and auto ancillaries segments?

One needs to have a selective approach while investing in the industrial or auto space. While the growth outlook is strong for both segments, most of the companies are trading at premium valuations, which creates a price risk.

We continue to remain bullish on select two-wheeler and commercial vehicle manufacturers. We are also positive on select railway, shipbuilding, battery, and aerospace and defence companies.

What are the factors that can drive the market rally? What happens if the Fed holds the rates in 2024?

The impact of a Fed rate cut on the lower discount rate is nearly factored into stock prices. What is not priced in is the economic impact of the lower interest rates in terms of higher economic growth. A lower interest rate shall be positive for higher consumer spending and higher capital investments from corporates.

It is more important to acknowledge the possibility that there shall be 200 to 250 basis points rate cuts in the coming 18 to 24 months than trying to predict the timing of the first rate cut. Ensuing rate cuts by RBI shall be positive for the Indian equity markets, especially for IT and other export-oriented sectors.

Do you see any major risk to earnings for Q1FY25 as well as FY25?

Higher commodity prices, especially for crude oil prices, may increase input costs for consumer names, impacting their margins. The geopolitical uncertainty can also impact export-oriented businesses because of delays in certain discretionary spending.

However, the majority of domestic businesses, including financial services, infrastructure, industrial and basic materials companies, may have a limited or positive impact. We expect banks to deliver continued earnings growth with higher credit demand and lower NPAs.

What do you expect from the full Budget in July if the Modi government wins another term?

We expect continued focus on making India a global manufacturing hub with Make in India initiatives, performance-linked incentive (PLI) schemes and implementation of ease-of-doing-business policies. Defence manufacturing with a distinct focus on shipbuilding, combat and civil aircraft manufacturing, and MRO activities with dedicated industrial corridors shall position India as the global defence hub.

Energy security will be another key area with a focus on energy independence by 2047, renewable energy transition, green hydrogen, energy storage, and smart grid. Gati Shakti, PM Awas Yojna, semiconductor and electronics manufacturing, EV, and tourism, including the holistic development of Ayodhya, are expected to be the key focus areas for the government in the full Union Budget.

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