Daily Voice | Sonam Srivastava of Wright Research sees slowdown in IT, infra, but bets on auto, FMCG

With this move, the government intends to control domestic inflation due to rising crude prices and discourage domestic crude oil producers from selling their products internationally and making windfall profits.

This tax hike is a harsh step by the government, but it is warranted by their commitment to controlling the excessive inflationary pressures the economy is facing. Stocks like ONGC, Oil India, Reliance Industries, Mangalore Refinery and Chennai Petroleum shed 8-15 percent gains on July 1 after the announcement and the outlook for the sector has turned negative. It might impact ONGC and Oil India earnings for FY23 by 36 percent and 24 percent, so we could see more pain in these scrips in the medium term.

Do you think the consistent consolidation and possibility of another round of major market correction can spoil the mood of domestic institutional investors and retail investors?

The mood in the market has improved in the last couple of weeks, but this could be a short-term rebound. We did see a slight easing in European inflation. While the recession in the west is more of a reality, many expect the pain to be over sooner. Nevertheless, we cannot rule out another correction.

I believe that while a minority of new investors will get discouraged and quit, the equity market has gained a large set of sticky long-term investors in the past few years who will continue to support the market.

Any themes that you are buying aggressively?

We are excited about the rising consumer demand and reopening themes. We expect FMCG to keep reaping the benefit of good monsoons and easing crude prices. On the other hand, hotels, multiplexes and travel stocks also look attractive.

Auto has been a powerful theme in the last few months, but we are cautiously optimistic given that there has already been a strong rally. IT, which has corrected massively, has started to look exciting, and we are picking some stocks in this basket.

We are also excited about the new India stocks gaining from the government production linked incentive (PLI) schemes, which we expect to outperform as soon as the switch happens towards growth.

Do you think the market has made the final bottom by hitting lows in June and waiting for a trigger to see a sharp move?

It is tough to say we have reached the bottom. Many in the market are calling for the worst time to be over, but you can never confidently say that, given the type of uncertainty we have seen in the last year. The Fed rate hikes are priced in, and we are now just waiting for positive triggers like the easing of inflation or the end of the conflict in Ukraine.

A triangular pattern formation on the charts and the price movement in the subsequent few trading sessions will be essential and confirm either a positive breakout or a negative trend.

Is there any possibility of another round of correction in the metal sector/stocks before any bottom formation?

Metal prices are increasingly governed by the Chinese economy, which has started showing signs of recovery after a long time. If the recovery in China persists, we could see some strength in the Metal prices at rock bottom right now.

A sustained long-term recovery in meal prices will only come after the current global environment calms down and focus shifts to infrastructure spending.

Among commodities, do you think oil is the last to collapse?

In an inflationary environment, there is a supply-side constraint on commodities, and the bankers are trying to bring down demand to match that. So while the recent correction in commodity prices might end with oil, we can see commodity inflation revive again while inflation is roaring. So the short term might be negative for commodities, but we could see a resurgence in the prices in the medium term.

Companies will start releasing their first-quarter earnings scorecard in the current month. What are your general expectations?

We expect early signs of a slowdown in the earnings from next week. The IT sector will show margin pressure, high attrition and low hiring patterns. Infrastructure, realty and other cyclical might show early signs of a slowdown.

On the other hand, the auto sector could show good numbers, and FMCG could also show encouraging numbers. We expect the commentary for most companies to become more cautious and sombre given the global situation.

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