Baroda BNP Paribas Mutual Fund has reduced exposure in the IT sector on the back of the expected continued slowdown in the sector, said Sanjay Chawla, Chief Investment Officer – Equity, in an interview with Moneycontrol.
He further says with recessionary pressure looming on global economy, the asset management company is being more cautious about the IT sector than before.
Sanjay Chawla, a veteran in fund management, equity research, and management consultancy with over 33 years of experience, feels that the key positive for both staples and discretionary sectors is the ongoing correction in raw material prices. From staples perspective, given the likely pass on of increasing grammage or price benefit from companies to customers, a demand revival can be seen going forward, he says.
Q. Do you think the Q1FY24 will be a weak quarter for the chemical industry?
Q4FY23 results were generally weak across much of the Indian chemical industry, with the notable exception of the contract manufacturing space, where several companies continue to report strong numbers underpinned by orders in hand, exposure to innovator-customers and defensive end-uses.
Inventory destocking by customers and/or weak demand from certain end-uses are expected to linger on through most of 1HFY24. China’s reopening post-Covid has disappointed, and the resultant weakness in demand in that country, combined with overcapacity across products, is leading to a spurt in exports and therefore severe pressure on product prices.
Q. Your take on the consumer staples and discretionary segments?
A key positive for both Staples and Discretionary is the ongoing correction in raw material prices. From staples perspective we can expect some pass-on from companies to customers in terms of increasing grammage or price benefit. These measures could help revive demand going forward.
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Discretionary continues to show a mixed trend wherein Jewellery, Spirits, Paints showcased strong demand whereas Quick Service Restaurants reported weak demand, with early signs of bottoming out. Reducing raw material prices can help in improving margins or stimulate demand as few players are passing on gains. Also focus of retail players is to drive Exclusive Brand Outlets expansion with a far wider reach in smaller cities.
Q: Are you still cautious about the IT sector?
We have reduced our exposure in the IT sector on the back of the expected continuing slowdown in the sector but are being selective as well. With recessionary pressure looming on the global economy, we are being more cautious about the IT sector than before and remain selective. Demand remains affected by slower decision-making, caution around spending and project ramp-downs.
Q4FY23 earnings commentary also confirmed the dull demand environment and cuts in discretionary IT spends. IT firms expect a soft H1FY24 as the declining headcount and cautious pricing outlook suggest a sharp moderation in FY24.
Q. Do you see more value in the smaller private banks, than larger banks?
Small private banks are trading at lower valuation multiples compared to larger banks and NBFCs and, historically always they have traded at discount to large banks and large NBFCs. However, the attractiveness of valuation depends on credit growth.
Generally, when industry credit growth rebounds, these small private banks tend to gain market share and they report credit growth higher than the industry. At that point, generally, they tend to outperform the index and peer large banks. However, the reverse is also true and even if at that time valuation is lower compared to private peers, these banks tend to underperform.
Q. What could be the possible next step by the Federal Reserve in its July policy meeting after a pause in June?
We believe that central bank in the US is seeing input cost inflation come off sharply which gives them space to take a pause, but they don't have the confidence yet in durability of the disinflation and are hence taking a cautious approach by maintaining a hawkish tone.
An extended pause looks likely for US Fed since inflation is still above 2 percent target. One thing to note is forecasts showed that 9 of the 18 FOMC members expect two more rate hikes this year, and 3 expect more than two hikes in CY23.
Q. Do you see any kind of challenge for the domestic growth numbers?
Indian economy can be seen in Goldilocks moment as it continues to report strong GDP growth and inflation has started to cool-off. Macroeconomic, and financial conditions have remained resilient. Capex indicators are healthy, with capacity utilization improving further and given signs of rising new project announcements.
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The domestic economy is also expected to face challenges from an uninspiring global outlook going forward, with higher global uncertainty, tightening global financial conditions, lower corporate profitability and still-elevated inflation.
Inflation continued to ease, falling to 4.25 percent in May 2023 — the lowest in the past 25 months — helped by base effects even as both, food and core inflation, rose sequentially. Core inflation stayed at 5.2 percent YoY. This can help in a continued rate pause, with upside risks from adverse weather conditions and global volatility.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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