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Daily Voice | This fund manager sees rerating in banking valuations as profit pool reaches normalcy

Chandraprakash Padiyar of Tata Asset Management thinks IT sector is facing an issue of high expectations. Business growth is likely to be somewhere around 10 percent on a sustainable basis for the sector.

September 22, 2022 / 10:42 AM IST

Growth slowdown is a concern going ahead and hence starting 2023, Fed interest rate hikes may see a pause, Chandraprakash Padiyar of Tata Asset Management says in an interview to Moneycontrol.

But, "as of now now trend on inflation does point towards further tightening," he says. Federal Reserve raised interest rates by 75 bps to a range of 3.00-3.25 percent, hinting more such rate hikes to lower inflation.

The Senior Fund Manager at Tata Asset Management with over 21 years of experience in research and fund management believes the profit pool for Banks is reaching normal levels. So "we are seeing rerating of valuations for the sector. My sense is, there is still some room for the sector to do well," says Padiyar who manages Tata Large & Mid cap Fund, Small Cap Fund, and Hybrid Equity Fund.

After recent interest rate hikes, do you expect Fed to remain aggressive in policy tightening in coming meetings to lower inflation?

Interest rate hikes will depend on inflation data going forward. As of now trend on inflation does point towards further tightening. Also one needs to see whether the US Fed pauses rate hikes before achieving the 2 percent inflation target or continues to tighten till they achieve their targets. Growth slowdown is a concern going ahead and hence our sense is that starting 2023 rate hikes may see a pause.

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Are we in the big profit cycle? Also do you expect significant increase in the share of profits to GDP in coming quarters as India is on a strong growth path?

Yes, profit pool for India is normalising with large sectors like Banks, Telecom moving towards normalcy. Profit to GDP is likely to move higher gradually over the next 12 months.

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We do need to see the investment cycle to pick up higher from current levels for the profit share to move higher beyond FY24. Job creation is required which is also a function of the investment cycle. The early indicators look promising.

Do you think India's correlation with oil is going to come down considerably in coming years?

India is highly dependent on crude price and correlation will remain for the foreseeable future. Past 6 months have been unusual that equity markets in India have continued to perform well inspite of high volatility in energy prices and the resultant spike in trade deficit.

Our sense is that risks are increasing for the markets if we get another spike in energy basket over the next 12 months.

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Do you think IT space is near the bottom now as it is already 30 percent down from record high levels and it has been hovering around 26,000-30,000 levels for several months now?

I think IT sector is facing an issue of high expectations. Business growth is likely to be somewhere around 10 percent on a sustainable basis for the sector.

CY20-21 saw a sharp rerating of the sector on the back of higher expectations which was not sustainable in my view. Incrementally expectations are becoming more rational and hence maybe we are reaching reasonable levels for the sector.

Do you think financial is the great space to be in now?

The profit pool for Banks is reaching normal levels. Unlike IT where expectations were high, for Banks expectations were very low. With profits now normalising we are seeing rerating of valuations for the sector. My sense is, there is still some room for the sector to do well.

Do you expect rerating in cement companies given the increase in industry capacity utilisation?

Consolidation in the sector is needed. Capacity utilisations have moved lower over the past few years on the back of new capacity additions by existing players. We would turn optimistic on the sector if more M&A takes place helping profitability move higher.

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.
Sunil Shankar Matkar
first published: Sep 22, 2022 10:42 am
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