Daily Voice | Sameer Kaul of TrustPlutus Wealth expects earnings to remain tepid

We expect IT companies to sustain their YoY growth momentum on account of robust broad-based demand and deal pipeline. Hiring trends in the past quarters indicate strength in demand and revenue visibility. Environment is conducive for pricing hikes; however, near-term margins are expected to remain muted on account of salary inflation. IT companies have increased fresher intake to address the shortage of skilled employees and reduce delivery costs. Attrition has remained at elevated levels and supply will continue to lag demand. There may be some moderation in attrition starting FY23.

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While valuations remain on the higher side compared to 10-year average multiples, we remain positive on account of the demand environment and double-digit revenue growth in the medium term. Continuation of strong commentary for FY23 should help sustain valuations, despite premium valuations. We prefer tier one players to tier two IT companies, given their relative valuation comfort.

Indian equities rebounded more than 14 percent from recent lows. What is the reason behind such a strong resilience?

The rebound actually was fuelled by talk of a let-up in the Russia–Ukraine crisis. However, if we look deeper, the market was oversold due to large FII (foreign institutional investor) outflows, while DII (domestic institutional investor) and retail flows remained robust. Thus, the moment FII flows abated and turned even modestly positive, markets rallied hard. This is more of a tactical rebound from oversold levels. We think that the markets could remain in a range given the various uncertainties across the globe.

Several sectors are finding it very hard to deal with input pressure, though they managed to hike product prices in the recent past to support margin. What is your view on earnings?

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Actually, there is an all-round increase in costs – fuel, labour, commodities, etc. This is compounded by a partial collapse in supply chains due to the situation in Europe and China. Logically, this should lead to lower demand all around, and very few companies will remain insulated, if at all. The capacity of manufacturers to pass on costs to the consumer is also limited by the increase in earnings of the consumer. So, maybe we will see a decline in volumes that is followed by an adjustment in labour costs before volumes recover and start growing again.

Overall, we expect earnings to remain tepid, with low single digit growth or even a decline on a sequential basis.

Do you still see value in banking and financial space?

The prospects for the banking sector will majorly depend on loan growth. The same currently stands close to around 9 percent YoY. This is still a weak number. Credit to large corporates is yet to pick up meaningfully and continues to be flat YoY.

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Unsecured credit segments such as credit cards, microfinance and personal loans will see better prospects as banks underwriting appetite improves. However, banks are likely to indicate pressure on interest margins on account of increased competitive intensity and stable cost of funds as lenders shift focus to growth from asset quality issues.

Higher treasury gains drove non-interest income in the past few quarters. Now yields have stabilised and have seen marginal increment in the past few months. Hence, we expect treasury gains to be relatively muted going ahead.

What are your thoughts on the RBI policy that maintained status quo?

It seems that the RBI is watching a few things before they act, namely, the way inflation unfolds beyond their 4 percent (+/- 2 percent) range, the actions of the US Federal Reserve and other central bankers, the GOI's borrowing programme, progress on divestment, oil prices and so on. Under the circumstances, it seems that they will stay the course till they see some tangible action by the US Federal Reserve. Till now, their only tangible action has been an increase of 25 bps, in the face of inflation in excess of 7 percent. In a world where capital is fungible, running a positive real rate while the rest of the world runs a negative real rate could seriously harm any green shoots that are visible in the Indian economy.

Do you think it is the time to bet on electric vehicles (EVs), charging infrastructure, renewable energy segments, etc, or should one wait till these segments stabilise?

Rise in fuel prices is definitely boosting a transition towards electric vehicles. Government subsidies have also boosted demand. FY22 ended on a strong note with electric 2W (e-2W). EVs also provide a considerable amount of savings over a couple of years despite the higher upfront capital cost. This definitely points to a strong demand environment, but constraints in supply chain is still a hurdle for EV production.

Geopolitical tensions have led to a spike in prices of metals such as nickel and aluminium – both used in ample quantities in making of an EV. The charging infrastructure for EVs is yet to be widely established. So, we would wait and watch out for stability in these segments from both – the business and the valuations perspective.

Do you think elevated oil prices will remain a risk going forward?

Clearly, elevated oil prices are a risk. At best, there will be an adjustment period of a few quarters where wages increase, after which the economy will be able to absorb higher prices – this is the best case. However, realistically speaking, many businesses cannot sustain higher costs at their levels of margin. We think that under the circumstances, companies which have the capacity to sustain themselves through this cycle will emerge as winners. We have positioned our portfolio towards quality large cap stocks.

Whether oil itself will remain elevated for much longer depends wholly on whether Iran starts pumping oil, and at what velocity. If Iran was to get back to 5 million barrels per day, there should be a thaw in oil prices. Other than that, there does not seem to be any immediate reason for oil prices to collapse.

From a fiscal perspective, we are well placed, as our balance of payments should be in surplus due to our IT exports and foreign remittances. We also have a large cushion of foreign exchange reserves, which will help us tide through these turbulent times.

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