Shibani Sircar Kurian, Senior EVP & Head-Equity Research, Kotak Mahindra Asset Management Company, expects the Reserve Bank of India to hold policy rates on June 8 as inflation moderates below the upper band of the central bank’s tolerance band.
Kurian, who has 19 years of experience in markets with a focus on fund management and research, is upbeat on domestic-facing sectors but remains underweight on global-facing sectors, including IT.
"Overall, we expect the operating environment over the next two quarters may remain challenging due to the macro issues and cautious stance of companies on discretionary spends," she says of the information-technology sector. Edited excerpts:
Do you expect a change in Federal Reserve's rates in the upcoming policy meeting?
It is likely to be a close call. Fed fund futures appear to be factoring in the possibility of a hike in the June policy meeting. The Federal Reserve has a tough task on hand balancing growth-inflation dynamics.
On one hand, the growth parameters for the US economy remain weak and the headline CPI inflation has been moderating. On the other hand, core CPI inflation and services inflation remain sticky.
What is your outlook for FY24 earnings in the wake of the recent corporate earnings season?
The recent corporate earnings season was largely in line for Nifty companies with estimates, with earnings growth being driven by domestic- facing sectors such as banks and autos. Margins for most companies have started improving on a sequential basis with commodity costs having corrected sharply.
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The earnings growth estimates for Nifty companies for FY24 and FY25 have not undergone much changes and the consensus estimates remain of mid to high-teen growth.
Do you expect a change in policy stance by the Reserve Bank of India (RBI) when it comes up with the outcome of its policy review on June 8?
We expect the RBI to keep policy rates on hold in the upcoming policy meet. Inflation has moderated below the upper end of the RBI's tolerance band. Going forward, it is likely that RBI would monitor the progress of the monsoons and any impact on food inflation as well as the domestic growth outlook and the stance of the US Federal Reserve.
Your preferred bets for FY24 after recent corporate earnings?
Domestic growth remains more resilient than global growth and the same is reflected in terms of corporate earnings. Banking remains one of the top sectors across our portfolios. We have seen credit growth improving, asset quality issues have subsided quite a bit and banking sector balance sheets and capital adequacy ratios remain healthy.
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We are also positive on a few other domestic businesses such as industrials, capital goods auto, cement, etc. We are cautious on global-facing sectors such as metals and IT.
Do you expect a healthy recovery in rural demand in the second half of 2023?
There appear to be nascent signs of rural demand recovery and real rural wages have started improving with declining input cost pressures. Monsoons remain a monitorable. On May 26, 2023, IMD updated its forecast for the upcoming Southwest Monsoon season (June – September).
While maintaining its earlier forecast (released on April 11) that rainfall is expected to be normal, the release did have additional caveats around El Nino and a weak start with below-normal rainfall in June. However, the impact of monsoons depends not only on the quantum but also the spatial distribution of rains.
Further, steady gains have been made in irrigation over the years. One must also remember that today, the rural economy is not only agriculture with the rest being supported by infrastructure development. Rural infra improvements often help to soften the agri blow in bad years.
Do you see better earnings growth in the IT sector in FY24? Have you started taking big exposure to the space?
We remain underweight on IT as a sector. The macro overhang witnessed post the unfolding of regional bank issues in the US and EU impacted the growth and margin exit rates in March 2023. The companies which reported March 2023 results, so far, expect some spillover of this weakness into the June 2023 quarter as well.
Initial expectations of margin improvement have been kept under check on account of negative operating leverage, given the sudden ramp-downs the sector had seen. Overall, we expect the operating environment over the next two quarters to remain challenging due to the macro issues and cautious stance of companies on discretionary spends.
Do you see a significant growth in NBFCs in the current financial year and is it better for investment?
Growth for NBFCs has been improving with disbursements across retail segments seeing a revival. There appear to be strong cyclical tailwinds in CV (commercial vehicle), microfinance segments. While liquidity remains comfortable, with rising rates, marginal cost of borrowings for NBFCs continues to rise which has impacted NIMs for NBFCs.
From here on the interest rate trajectory is a key monitorable and policy rates. Any change in policy rate stance is likely to be a positive for the sector. Select NBFCs/HFCs with strong parentage, healthy capital position, lower leverage and matched asset-liability profiles appear to be better placed.
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