Green Portfolio PMS founder Divam Sharma has a mixed view on the March quarter earnings — autos and banking have done well but pharma is still ailing on the margin front.
Cooling inflation and commodity prices, however, augur well not just for the pharma but also for chemicals and textiles, says Sharma, who has more than 15 years of experience in managing investments.
In an interview to Moneycontrol, he says chemical companies will be in a pole position as inflation slows, margins improve and exports recover. Valuations are extremely comfortable in this sector, he says. Edited excerpts of the interview:
Are the largecaps reasonably valued now?
The broader market is heavily discounted and unreasonably valued. If you look at the BSE 250 smallcap index, the index is trading at a price-to-earnings of 18.5x, which is only slightly above 2020 lows. Small and mid-caps is the space we are bullish about and (have) expertise in.
However, the Nifty50 and the largecaps have seen a good run and believe they are reasonably valued now. If international consumer and industry demand continues to remain weak, it will affect our exports negatively. This slump in exports, if I take it as a case, will be counterbalanced by the buoyant consumption market. Strong domestic sentiments can be observed from the GST, power consumption and travel data.
Do you think the margins have peaked out in the banking space?
We have seen a healthy run-up in net interest margins (NIM). In extension to the rapid rise in RBI interest rates, we are now seeing banks sitting at a comfortable NIM of around 3.5 percent. As interest rates peak and we expect a rate cut later this financial year, we will see NIM falling.
However, this will be well balanced with strong credit growth from both retail and corporates. SBI’s recent comments about a 14 percent growth expectation for FY24, tailwinds from consumption, and expectation about a sharp revival in private capex will help balance the decline in NIM and keep the bottomlines of the banks intact.
Also read: ONGC Q4 | Net profit plunges 97%, revenue rises 5.9% amid provision dispute
Do you expect the Reserve Bank of India and the US Federal Reserve to cut rates in the first quarter of the next calendar year?
Yes, the Fed would begin cutting interest rates as early as November and we expect RBI to take a longer pause. RBI wasn’t as aggressive in raising rates as the Fed was and took a wait-and-see approach.
If you see in the US, inflation has numbed, retail sales growth is stagnant and manufacturing is showing degrowth. Even if you take the record-low unemployment rate into consideration, the economy has begun to face headwinds. Hence, to quell this pain, the Fed will have to push the button later this year.
Also read: Sensex will hit 1 lakh mark in 5 years | Chris Wood of Jefferies
Have you seen more positives than disappointments in earnings in the fourth quarter of FY23?
The March quarter earnings have been a mixed bag. We are seeing sectoral trends. The chemicals and textiles companies on our radar have witnessed a quarter-on-quarter improvement in performance but when I compare it on a year-to-year basis, the performance is tepid. On the positive side, margins and revenues have seen a solid pick up and share prices are reacting to the upside as a lot of negatives were already priced in going into the result season.
Autos and banking continue to do well. Pharma is still facing some pressure with the margins. The results aren’t encouraging overall, but considering how the stocks in chemicals, pharma and textiles had reacted in the past year and the discount given to them, we consider these results appealing.
What do you broadly expect from the first quarter of the current financial year after reading Q4FY23 numbers?
The slowdown in the wholesale price index and commodity prices are encouraging. Exports from India have contracted by 12-13 percent in April and we have been seeing this trend since a while now. These lower commodity prices will support pharma, textiles and chemicals space especially.
As interest rates peak and consumer demand in the international market comes back, we should see export demand picking and companies in small and mid-caps report encouraging results.
One sector that must be a part of the portfolio after the earnings season?
It should be chemical stocks. If we are able to capture just 10 percent of the export demand going to China, our chemical exports will double. With the slowdown in inflation, improvement of margins, the commencement of new capacities, and recovery of exports, this sector will be in the pole position. Valuations are extremely comfortable in this sector.
Your take on gas stocks?
The gas stocks are highly receptive and dependent on government policies and mainly the price of international crude prices. This is a very volatile space to be in.
Despite the fall in crude prices by 45 percent from their recent highs, gas stocks have held up well, thanks to LPG price hikes and a slash in windfall taxes. Coming to your question, we do not have any exposure to this sector and do not find this space attractive as it has had a good run and we feel the upside is limited at these levels.
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