Madhusudan Sarda, the fund manager at Credent AIM Multi-Cap Strategy, feels that while near-term numbers would be muted structurally in the medium to long term, the Indian IT sector is well poised to capture the rebound in tech spending on IT services from various developed countries.
By the end of FY24, the IT sector would probably start heading back to its long-term growth trajectory, says Sarda, who has more than 2 decades of investing experience in the public markets with a focus on micro, small & midcap stocks.
After recent RBI policy minutes, he says the interest rate cuts are not expected to happen drastically or very soon but are only possible if there are recessionary pressures from global economies.
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Q: Do you hope that the IT companies will be able to raise their full-year (FY24) guidance in the second half, considering the global environment?
In FY23 the IT index underperformed, but we still believe Indian IT remains a strong structural story. Digital transformation and cost optimization are the two main drivers for IT services, once these regain momentum the sector is expected to do well.
Management commentary suggests that the pipeline of projects is strong but the conversion is taking a little longer, and hence while near-term numbers would be muted, structurally we feel in the medium to long term the Indian IT sector is well poised to capture the rebound in tech spending from various developed countries for IT services.
By the end of FY24, the IT sector would probably start heading back to its long-term growth trajectory.
Q: Do you expect a margin boost in discretionary and FMCG segments in the coming quarters after headwinds in the past?
In FY23, the consumer sentiment has remained weak and there has been only pricing-led growth in the discretionary and FMCG segments, whereas in the current year with stabilizing input costs and intense competition only volume-led expansion would support growth in the sector.
We expect volume growth to pick up only when rural demand recovers in a sustained manner, which we believe is slightly delayed and would also delay a boost in margins.
Any negative monsoon impact shall further delay the growth of the rural economy. On the contrary, the urban markets continue to support volume growth and are expected to stay strong.
In the short term, we aim at focusing on premiumization-led growth in the sector which in turn is expected to support the stock price.
Q: Do you think the market is waiting for a clear signal from the Fed with respect to the end of the interest rate hike cycle or it is already priced in?
Markets are always ahead of the curve and react to economic changes before they occur. The underperformance of markets in the last 12-18 months has majorly priced in the interest rate hikes and we being almost at the peak of the interest rate cycle are now ready to take advantage of this economic condition by investing in the equity markets.
Difficult to predict the trajectory of the broader market index but stock-specific pockets available at favourable valuations with a positive earnings potential are expected to do well. The combination of valuation, earnings, domestic strength and expectation of reducing inflation shall cumulatively contribute to wealth creation.
Q: Do you expect the economy to grow lesser than 6.5 percent, the target set by the RBI for FY24?
The domestic economy has been strong and is expected to grow well. Service exports are also doing well which is supporting the India growth story. The manufacturing exports which are currently not doing great are expected to revive in FY24 with improvement in global economies and India’s advantage of low labour costs, government incentives and the capex recovery cycle.
With interest rates at their peak and strong domestic consumption, we expect buoyancy in the Indian economy and do agree with RBI’s target of 6.5 percent growth of the Indian economy. India’s private consumption constitutes 60 percent of the GDP which is expected to be a growth factor for the nation in FY24.
Q: What is your take on the latest RBI Monetary Policy minutes?
RBI has taken a tactical ‘pause’, to assess the impact of the tightening of the economy. With an expectation of cooling down inflation, the committee agreed to not increase the rates. Further RBI rate hikes depend on the inflation numbers, WPI has cooled off and we expect the CPI numbers also to be lower.
The committee guided that the pause in no way signals the end of the interest rate cycle but we believe that inflation would be under control and this pause would be an extended pause and might also be very close to the peak of the cycle.
On the contrary, rate cuts, too, are not expected to happen drastically or very soon but are only possible if there are recessionary pressures from global economies.
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