The IT space is simmering, with valuations far outstripping their long-term averages, yet they do not seem to be out of bounds. But, Ram Kalyan Medury, Founder and CEO of Jama Wealth, sees some corrections ahead with the Fed raising the policy rates at a rapid pace.
In an interview to Moneycontrol, Medury shares that the success of the upcoming public issues will determine the trend in the primary market. Excerpts from the interaction:
How do you approach IT stocks especially after earnings by IT majors? Do you see any impact of Fed rate trajectory on the IT space?
Technology has become the backbone of the global economy and the listed Indian IT majors have grown well. TCS, for instance, is among the top ten IT companies in the world and continues to shine bright with its continued, consistent broad-based mid to high teen YoY growth across verticals and geographies. Margins, deal wins all look good as of now but in the post-COVID talent wars employee costs have escalated.
We expect the companies to focus on cost control over the next two years. The BSE IT index is down 10.63 percent from its all-time high but has also clocked 33 percent growth from its low last year. It is not a time to go overboard on these stocks and one ought to keep the allocations moderate.
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The valuations are significantly higher than their long-term averages, though they do not appear exorbitant. Allocation is very important in long-term investing. Going overboard on anything at any time is not advisable. The sector may undergo a correction depending on the Fed's tightening moves.
Do you think higher valuations compared to other Asian counterparts is the only and major reason behind FII outflow?
Valuations, I believe, is not the only reason for FII outflows. In fact, while they are net sellers, they are also buying. The outflow is temporary and money will come back to Indian markets. Outflow could be because of the natural tendency to move to safer havens (i.e. the home bias), particularly with more interest rate hikes expected. They may also wish to manage their returns in dollar denominated terms as rupee depreciation cannot be ruled out due to higher fuel prices and shrinking difference in interest rates in India and the US.
Do you think the Fed rate trajectory has already been priced in by the market?
Yes, the markets quickly discount any information that is a front page news or a topic of discussion. For example, even though the RBI has kept policy rates unchanged, banks have increased interest rates on FDs and G-Sec yields have gone up by more than 100 basis points over the last one year.
Any thoughts on commodity-linked sectors that are expected to do well?
Generally speaking, yes. That is economics. If supply is cut short, prices move up and sellers benefit. However, we need to specifically look at what commodities are likely to be in short supply, which other countries can meet that demand and whether companies are in a position to take advantage of this situation. Government policy will also come into play.
Do you expect the IPO flow only in second half of FY23?
Prior to the sell-off, there was a feeling that anything can be offered to the public and they will lap it up. However, the listing losses and further decline in Paytm price shook people off this belief and particularly jolted the retail investor. There was a sudden fear as to whether we are entering into a bear market phase.
We will see IPOs hitting the market and getting subscribed. Not all of them would be companies with a great track record. The success or otherwise of the next few IPOs will determine whether more IPOs will follow.
Do you expect India's growth to fall below 7 percent for the current financial year?
Yes, it is possible that growth figures can be lower.
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