Daily Voice: This portfolio manager feels double-digit growth could be challenge for market in 2023

The telecom sector, globally as well as in India, suffers from high capital intensity, low pricing power and high regulatory risks. Having said that, the telecom sector in India is now essentially a two and half players market, having seen significant consolidation since the launch of Jio.

Even after the conversion of government dues into equity, Vi still remains over leveraged and continues to lose market share. It needs additional equity infusion immediately. In the current scenario, either tariffs need to go up over the next twelve months to a more sustainable level or there could be survival issues for Vi. In either scenario, the other two players should benefit.

How many more interest rate hikes are expected from the US Fed as well as the RBI? Do you think the higher interest rates would stay for a longer period and dampen growth given the current global environment?

Even though supply chains have now normalised, low unemployment and high consumption continue to put inflationary pressures on the US economy. Historical trends indicate that inflation is usually stickier than most people assume. To that extent we could be in an environment where rates in the US remain high for a longer period.

India, however, is much better placed. The government has significantly increased public capex. Corporate balance sheets are healthy, and banks have cleaned up their bad loans over the last decade. This, along with several initiatives from the government such as various PLI (production linked incentive) schemes as well as move towards China plus one in terms of supply chain should trigger the private capex cycle as well. In a supply constrained economy like India, this should improve long term sustainable growth rates and ease inflationary pressures.

Do you expect further weakness in corporate earnings in coming quarters?

Corporate earnings trends should vary from sector to sector. There has been a material slowdown in consumer discretionary spends, which could sustain in the near term. Longer term though, these businesses have a long runway for growth.

Given the weak global macro environment, some of the IT and Pharma stocks could also see continued weakness. On the other hand, credit growth remains strong and asset quality is healthy. So, banks and NBFCs should report healthy growth. Industrial goods companies should also see healthy demand driven by a pickup in the capex cycle.

Is it the right time to look at dividend yield stocks?

Value stocks and dividend yield plays have done very well over the last twelve months, driven by a rising interest rate environment, and tightening liquidity conditions. This trend could continue to play out in the near term.

From a three to five-year perspective though, India should see healthy GDP growth and rising per capita income. As a result, there are several businesses that are either at a nascent stage or about to hit an inflection point in growth. We continue to focus on identifying such businesses that are now available at a reasonable valuation.

Do you think valuations are still stretched in new age names?

New age businesses have seen a significant correction over the last twelve to fifteen months and valuations have certainly moderated. However, one cannot paint them with a broad brush. Capital raising will remain a challenge over the next several quarters given the losses many investors have suffered as well as a tight liquidity environment.

Many of these businesses will therefore have to focus on cash conservation and becoming profitable. As they reset their business models, many of these businesses could have negative surprises on growth, which was the north star metric for them all this while.

However, new age businesses that have focused on capital efficiency, free cash flow generation and maintaining healthy unit economics are well placed to strengthen their market position over the next several years. We would focus on such businesses where valuations have moderated.

Do you see any possibility of the equity market ending the calendar year with double-digit gains?

While valuations have seen a time correction over the last eighteen months, they are still above historical averages. This remains the biggest headwind for the Indian stock markets. In the end, a company's stock price is driven by the underlying earnings growth.

While double-digit growth for the market overall could be a challenge, there would certainly be certain sectors and companies that are enjoying tailwinds driven by a pick-up in demand, rising market share or improving operating leverage. Therefore, our focus remains on identifying these companies that have a healthy earnings outlook over the medium term.

On the sectoral front, where do you want to put your money now?

As discussed before, we remain positive on the domestic capex cycle. Several factors are aligned for corporate capex to pick up. We believe industrial goods companies would be the key beneficiary of this trend. Apart from that, the banking sector would also benefit due to a pick-up in credit demand and healthy asset quality trends.

Real estate demand also continues to remain strong, which would benefit building products companies. Therefore, we would focus on identifying strong companies, run by exceptional management teams, that have strong barriers to entry and a long runway for growth in these sectors.

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