Moneycontrol PRO
Watch Live: Day 8 - INTRAZON 3.0 |India's Largest Retail Intraday Traders Online Conference

Daily Voice | Time to overweight on IT space, banking and financial services look bright, says Sonam Srivastava of Wright Research

If the RBI decides to hike rates in the second half of the year, it will be a positive sign for the banking and financial sector as the interest income increases.

April 16, 2022 / 08:29 AM IST
Sonam Srivastava is the Founder of Wright Research

Sonam Srivastava is the Founder of Wright Research

If the Reserve Bank of India decides to hike its key policy rates in the second half of the year, it will be a positive for the banking and financial sector as it will boost the interest income, says Sonam Srivastava, Founder of Wright Research, in an interview to Moneycontrol.

On the IT sector, she believes, both large-caps and mid-caps are good to go overweight at the current time. With the Fed hiking rates and the RBI maintaining a status quo will firm up the dollar and it will translate into a surge in business for IT companies.

Srivastava shares her views on various aspects of the economy and finance standing at the onset of the earnings season for Corporate India. Excerpts from the discussion:

Some of the IT majors have just their quarterly and full-year earnings. Moreover, the US Fed has raised the key policy rates. Do you think this is the time to go overboard on IT stocks? 

The earnings season has become a great time to focus on IT stocks as the momentum in earnings and revenue growth continues. On a solid note, TCS has released a 7 percent on-year increase in net income, steady margins, beating street expectations, and closing FY22. The incremental revenue is the maximum ever reported by the company.

A similar outperformance is expected from other IT biggies as well. As a result, the IT sector - comprising both large-caps and mid-caps - is good to go overweight at the current time.

Also readIDBI Bank seeks shareholders nod for 10-fold hike in MD & CEO salary

The backdrop of the Fed hiking rates but the RBI keeping rates steady will cause the dollar to strengthen compared to the rupee. The dollar strengthening will support the Indian IT sector, which has a robust widening global order book.

Do you think higher valuations compared to other Asian counterparts is the only and major reason behind FII outflow?

The higher valuation of Indian stocks compared to their Asian counterparts is just one of the reasons for the FII outflow. The primary reason why FIIs are exiting an emerging market like India is the impending Fed rate hikes, raising the equity risk premium for the Indian markets. In addition, the commodity inflation caused by the Ukraine crisis and the imminent trouble in the emerging markets like India, which are commodity importers, also dampens the global sentiment towards India.

But as the crisis in Ukraine stabilises and the market gets a breathing room, we expect the FIIs to come flooding back into the Indian economy, which will be stronger than ever fundamentally.

Do you think the Fed rate trajectory has been priced in by the market? What are the bond yields indicating?

The US 10-year bond yields surged to hit a near three-year high after the consumer price inflation data showed a faster acceleration than economists had estimated. Most economists predict a 50-basis point hike each in May and June and a further 50 basis point hike later to close the year with a 2-2.25 percent interest rate.

Also readAir India Chairman N Chandrasekaran conducts major reshuffle in top management

The consensus is shifting over the practicality of rate hikes. The inflation we see is transitory, and accelerated hikes would dampen the already slow growth. Economists who were going for rate hikes a few months ago are now warning of stagflation or recession due to accelerated hikes. The market is pricing in the impact of the hikes in the short term. The long-term story is building and has to be closely watched.

Do you expect commodity-linked sectors to do well in the coming quarters, given the sanctions imposed on Russia by Europe and the US?

There will be an upwards bias on commodity prices until the Ukraine crisis cools off. The sanctions themselves will take an extended time to go away even after the conflict resolution.

We expect commodity-linked sectors to make the most of this. As crude oil prices have skyrocketed and still hover over the $100 a barrel level, Indian oil and gas manufacturing and refinery sector will see a margin expansion and a revenue growth. Metals and steel manufacturers have picked up post the crisis, but the long-term outlook is cautious because of global demand slowdown and high cooking prices.

Also readWall Street Week Ahead: Investors turn to defensive stocks as economic concerns grow

Ukraine is a major exporter of wheat, sunflower, barley, rapeseed and maize, and Russia has substantial control over global exports of sunflower, wheat and barley. The ongoing conflict will favour the Indian agri-commodity producers.

Several IPOs are in the pipeline, and in the year so far only Rs 7,800 crore has been raised through IPOs (mainboard). Even the market also stabilised after the recent sell-off. What are the reasons (apart from the Ukraine crisis) behind delaying the IPO launch? What could be the amount of fundraising expected this year?

The sentiment in the public market is highly correlated to the secondary market. This year, the secondary market has been volatile due to Fed rate hikes, concerns of overvaluation in Indian equities, and obviously, the Ukraine crisis. As a result, the primary market has become more cautious, and fundraising has paused.

We expect the fundraising to start afresh at a healthy pace in the second half of this year. The massive $6.6-billion LIC IPO is the big one that is coming, and some other significant technology unicorns will also join the list.

Click Here To Read All IPO News

Do you see any possibility that India's growth can be below 7 percent for the current financial year? 

The Reserve Bank of India has pegged the economic growth rate for 2022-23 at 7.8 percent, down from 9.2 percent expected in 2021-22, because of uncertainties on account of the pandemic and elevated global commodity prices. Hence, there is a low chance of the growth rate hitting below 7 percent. The triggers for the same could be - a heightened geopolitical situation, US rate hikes leading to FII sell-off, high inflation, low rural remand, and employment.

How do you approach the banking and financial services space now given the rising expectations for rate hike in the second half of FY23?

The banking and financial services industry is sweet, with the corporate sector picking up growth, manufacturing staying strong, and the government pushing for growth. As a result, the loan books are expanding, and the credit quality is better than ever.

If the RBI decides to hike rates in the second half of the year, it will be a positive sign for the banking and financial sector as the interest income increases. Therefore, we are very optimistic about the outlook of the banking and financial sector.

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: Apr 16, 2022 08:29 am