Asit Bhandarkar, Senior Fund Manager-Equity, JM Financial Asset Management, says frontline capital goods players are no longer cheap and he prefers to play the capex theme through the mid and small-cap category because of superior risk reward.
Bhandarkar, who has two decades of experience in equity research and fund management, says the May auto sales numbers have come as a pleasant surprise, especially for 2-wheelers which could be the sign of rural recovery.
The fund manager expects the Reserve Bank of India (RBI) to hold the rates while changing the policy stance to “neutral” when it meets next week for bi-monthly policy review. Edited excerpts of the interview:
Do you expect the economic growth to top the RBI's forecast for FY24 after better-than-expected numbers for FY23?
India is likely to remain one of the fastest-growing economies in the world, with FY23 growth reading pleasantly surprising the markets as economic activity, especially in the services sector, improved materially. Fiscal-monetary coordination between the government and RBI has tried to achieve a balance between inflation and growth.
India's aim of becoming a $5 trillion economy by FY26 is looking realistic on the back of the government's policy support along with an increase in private investments. We remain optimistic about India’s growth trajectory with a possibility of GDP surpassing the RBI’s estimate of 6.5 percent in FY24.
Do you think one should continue increasing exposure to capex plays? Are the capex plays overvalued now?
Valuations of frontline cap good players are no longer cheap but the opportunities presented by the return of corporate capex do exist. We prefer to play the same theme through the mid and small-cap category where valuations present a superior risk reward.
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Do you see healthy earnings growth in cement and industrials, given the lower commodity prices?
Yes, we are likely to see a favourable impact of lower commodity prices on several businesses, including cement and industrials. Given the global growth scenario, a benign forecast for commodity prices is indeed realistic.
Markets have the ability to sense this well in advance and to that extent, some of this may already be factored in the stock prices.
Your take on the consultation paper released by Sebi for additional disclosures for FPIs?
Though we are not experts on this subject and we do not understand the onerous obligations it entails, the intention here seems to be to improve transparency. Over the years, it's apparent that transparency and predictability do lead to higher trust and participation in our capital markets by all classes of investors.
Do you still expect a 10-15 percent rally in Indian equity markets?
Corporate earnings momentum has been better than expected. Outlook into FY24 appears stronger and more optimistic on the back of lower inflation, improving demand and interest rate stabilisation expectations.
Our markets have consolidated for over 18 months and valuations have become more reasonable. Our premium versus other EMs (emerging markets) has normalised to the historic mean.
To our mind, the stage might be set for the market to follow earnings growth here on. Bloomberg consensus earnings estimates do indicate market expectations of double-digit earnings growth. Elections in India and other developed nations as well as poor monsoons could be the risk factors that have the potential to cause volatility.
Your preferred bets, especially after FY23 and quarterly earnings?
We are seeing a broad-basing of growth in corporate India into FY24 and hence we are increasing our focus on the midcap segment. Several key lead indicators like fuel and power consumption, capacity utilisation, e-way bill and GST collection are clearly indicating strong activity levels.
India is being seen as a structural growth play among global and EM peers. India, being a commodity consumer, will stand to benefit from the reduction in prices here. Hence other than financials, we prefer to buy a wide basket of names with higher growth visibility and likely input cost tailwinds across sectors like auto, industrials, durables, capital goods and manufactured product exporters.
We are following a bottom-up valuation-driven approach and prefer to have a growth portfolio with lower volatility to try and deliver superior risk-adjusted return to our investors.
Your take on the auto sales data for May? What is your strategy for the auto and auto ancillary space?
We have been pleasantly surprised by the strong numbers posted by 2-wheeler players and it could be the first sign of a rural recovery. We do consider the auto sector to be a beneficiary of input cost reduction and to that extent, we remain positive.
However, we are watchful of the structural changes thrown up by EV (electrical vehicle) adoption and its likely impact on the legacy ancillary business. To that extent, we are approaching the ancillaries space with caution.
Your expectations from the Monetary Policy Committee meeting next week?
The April 2023 Monetary Policy decision to tactically pause after delivering a cumulative 250 bps rate hike since May 2022 came on the back of receding inflationary pressures, both on retail and wholesale front. There may be some upside risks to inflation in the short-term due to the monsoon-related uncertainty but a favourable base and softer commodity prices bode well.
One-year forward inflation outlook (Q4 FY24 at 5.2 percent) indicates a positive real interest rate of over 1 percent, which shall also prompt the RBI-MPC to stay put in the upcoming policy. We expect the RBI-MPC to maintain status-quo on rates while possibly changing the policy stance to neutral.
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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