Daily Voice | Tata Technologies a good business to own, valuations look cheaper, says this equity expert

The implications of the RBI’s retail credit tightening measures are both by way of signaling and actual impact. The central bank wants to restrain the exuberant credit lending by both banks and NBFCs as it carries the risk of triggering financial instability. The high-risk weight would imply curbing capital leverage for banks and NBFCs, specially those that are at the margin of capital adequacy requirement.

Higher risk weight will also increase the regulatory cost for lenders, thereby impacting lending rates and margins. Retail NBFCs dependent on credit lines from banks will face a double whammy. Their cost of funds will rise due to a 25pp higher in risk weightage applied by banks along with curtailment for flows, and higher risk weight on retail lending by NBFCs.

Hence, as the lagged impact of monetary tightening gets reinforced by credit tightening by RBI, the expected deceleration in high-growth retail lending should translate into higher retail NPA ratios as well.

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Given the latest US inflation data, do you think the one should not get worried about inflation concerns henceforth?

The lower-than-expected US in retail inflation at 3.2 percent has provided a bit of respite for the risk markets as expectations of the onset rate cut cycle by the US Fed sooner has intensified.

However, the core inflation remains elevated at 4 percent, resilience of the US economy is intact and the latest decline in the head line inflation has been due to decline in gasoline prices in response to the recent decline in global crude prices, which can be transient.

It will be hasty to expect the Fed to give up on its tightening as they have guided that it will take a long while for the core inflation to converge to its targeted 2 percent. In addition, there are consideration of liquidity shortfall due to credit rating downgrade, declining global flows into US treasury and elevated fiscal deficit. All these along with the geopolitical risks have the potential of keeping the fed rate sticky at higher level than the previous cycles.

Also does it mean that the Federal Reserve will hint about no further rate hikes and is done with rate hike cycle, in December policy meeting?

Given the above considerations and the recent communications, it is unlikely that the Fed will talk dovish in December.

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Do you see the soft-landing in the US now?

The probability of soft landing and a recession has prevailed interchangeably over the past one and half years. My sense is that the cyclical reset from the above trend demand conditions will eventually require a recession.

Is it the right time to start betting on IT stocks now?

IT sectors have failed to demonstrate satisfactory business conversion rate despite the strong order flows. In addition, the trends towards cost normalisation are now strongly visible. Investors interest is flowing back gradually in the hope that over the coming quarters the management commentary will incrementally turn more constructive.

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Are you bullish on power and power related stocks (including charging stations and solar glass)?

The power sector has seen rising demand both from the household and farm sector, as other fuel prices, diesel and LPG have risen rapidly. This has translated into better PLF (plant load factor) for power generation companies. There has also been good level of traction in the wind and solar sectors. Power stocks have done well in response to these tailwinds. Future will depend on what happens to global crude prices and domestic fuel prices.

Do you think the equity market has priced in that US interest rates seem to have peaked? Do you expect more run-up in equities and the benchmark indices hit record highs by December?

The markets have been pricing in US rate cuts since mid of 2022. But such expectations have been vacillating since then. But notwithstanding these gyrations, the benchmark indices have remained mostly flat over the past two years, performing less than government bond yields.

So, equity indices making record high is an overstated enthusiasm; we should look at returns not levels.

Your take on the Tata Technologies IPO....

It is good business to own as it is into a global engineering service that offers product development and digital solutions to global original equipment manufacturers (OEMs) and their tier-I suppliers globally. They have captive clients in JLR and Tata Motors.

The industry outlook is promising, and the company is also performing well both in terms of growth and returns. Since this is an OFS (offer-for-sale) issuance, the fund raised will not go to the company. The valuations appear to be around 27x 1 year forward, which is cheaper than the comparable listed companies.

What do you expect from the second half of FY24 earnings, after reading the first half of earnings?

Earnings expectations are normalizing, versus earlier expectation of 15-16 percent growth for Nifty earnings in FY24. The consensus are hovering around 11 percent now. Demand conditions are languid, and companies are relying on margin expansion. As we see have seen downgrades in the 1HFY24, the intensity will likely pick up in the 2H. BFSI sector is likely to take maximum share of downgrade.

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