Do you see bearish sentiment continuing in the equity markets in rest of financial year?

The average Nifty PE was 29-30 in FY21 and 24-25 in FY22 which is higher than the long-term average of 18-20. Additionally, let us not forget that Nifty provided an astounding return of 84 percent in FY21 and a respectable 20 percent in FY22. Our economy performed exceedingly well and we experienced splendid EPS (earnings per share) growth.

After these two extraordinary years, it is imperative for good sense to prevail. It is also vital to consider the impact of macro events that have happened in the recent past which has led to a certain degree of uncertainty. The seemingly unlimited supply of liquidity has finally rationalized and there is bound to be some consolidation.

Presently, we are trading at 20 times FY23 estimates and 17 times FY24 estimates which is a healthy range. Hence, we may want to take this chatter of bearish sentiment with a pinch of salt. Once these macro factors subside, we will once again witness decent returns because we are likely to experience corporate earnings growth of 20 percent EPS during this year and may witness a healthy growth rate of 15 percent to 18 percent during the next year.

Hence from current levels, markets should deliver 15 percent in the next year. In other words, the Nifty is expected to be in the 19,000 to 20,000 range by next year.

What are those sectors that you are betting on or you want to bet on in medium term, and why?

At Research & Ranking, we believe that investors can create substantial wealth by taking a long-term approach as India's structural growth story plays out. There are five major emerging themes that we are bullish on for the next 5 to 10 years. These include:

Theme 1 - Financialization of savings -> Sectors would include private banks, Insurance, Asset Management, and Depository and registry agents. The key reasons are low penetration, digitization and its rising awareness.

Theme 2 – Consumption -> Sectors would be Automotive, consumer tech, discretionary/lifestyle, consumer electricals, e-commerce. The key reasons include demographics, rising affluence and urbanisation.

Theme 3 – Digitization -> Sectors would be Niche IT/ITes, Automation. The key reasons are growing mobile and internet penetration and productivity improvement.

Theme 4 – Manufacturing -> (China +1/Make-in-India) – Sectors would be Capital Goods, Speciality Chemicals, Pharmaceuticals. The key reasons comprise cost advantage and government push

Theme 5 - Clean Energy -> Sectors would be Renewable, Electric Vehicle (EV). This is primarily due to the policy push by the government.

Do you think the defense space looks exciting now, with a top-down approach?

We are very positive about the Indian defence sector from a long-term perspective. India plans to spend $130 billion on military modernisation in the next five years to be self-reliant. Our country’s Amrit Kaal vision to be among the top five countries globally in defence production furthermore strengthens the buoyant outlook for the space. Some of the key positives for the sector are rising defence expenditure and the government’s push for indigenization.

As per 2021 estimates, India spent about $77 billion on defence which is 2.7 percent of the GDP and cemented its position as the third largest military spender in the world. With India emerging as one of the fastest growing countries in the world with consistent rise in its GDP growth rate, it is reasonable to conclude that we are looking at massive growth over the next few years. Secondly, the policy push towards encouraging indigenization and import substitution will provide impetus to indigenous manufacturing in the sector.

After most of key IT earnings, do you still see major earning downgrades in the sector?

Revenues indicate that the demand environment remains strong, with clients maintaining spends as of now. The deal pipeline looks healthy, with robust visibility over the next few months. We aren't witnessing any budget cuts or deferments in client spending although macro-economic concerns may impact the deal pipeline going ahead. As attrition levels are stabilizing, most front-line IT companies have some headroom available for margin improvement.

Overall, IT services companies have shown resilience in a challenging environment and have successfully managed their cost structure to align with the changing scenarios. Proposed buybacks by many of the frontline IT companies should be viewed positively.

Incidentally, for example, Infosys has declared a maximum buyback price at Rs 1,850 per share which is at a premium of 25 percent on its previous closing price.

One has to be cognizant that the IT sector has delivered more than 50 percent returns in calendar year 2020 and 2021. After two years of extraordinary performance, some moderation was expected. Earnings growth in the coming years is expected to be remain robust, although it may not be as high as more than 20 percent witnessed over the last 2-3 years. Hence, multiple contractions may continue but we may not come across major earning downgrades in the current year.

After most of key IT earnings, do you still see major earning downgrades in the sector?

Revenues indicate that the demand environment remains strong, with clients maintaining spends as of now. The deal pipeline looks healthy, with robust visibility over the next few months. We aren't witnessing any budget cuts or deferments in client spending although macro-economic concerns may impact the deal pipeline going ahead. As attrition levels are stabilizing, most front-line IT companies have some headroom available for margin improvement.

Overall, IT services companies have shown resilience in a challenging environment and have successfully managed their cost structure to align with the changing scenarios. Proposed buybacks by many of the frontline IT companies should be viewed positively.

Incidentally, for example, Infosys has declared a maximum buyback price at Rs 1,850 per share which is at a premium of 25 percent on its previous closing price.

One has to be cognizant that the IT sector has delivered more than 50 percent returns in calendar year 2020 and 2021. After two years of extraordinary performance, some moderation was expected. Earnings growth in the coming years is expected to be remain robust, although it may not be as high as more than 20 percent witnessed over the last 2-3 years. Hence, multiple contractions may continue but we may not come across major earning downgrades in the current year.

Do you think India will be biggest beneficiary of Europe+1 strategy?

Unlike China plus 1, the benefits of Europe plus 1 may not be as straightforward. This is because unlike China, where we are primarily competing for the same markets for exports, with Europe we have a more balanced trade flow. In simpler words, we both export as well as import goods and services.

Sectors that are energy intensive, especially the ones with high reliance on gas, would immediately look for alternate manufacturing and sourcing base. So, while export opportunities for these sectors may rise, this may be partly negated by the reduction of export of similar products to the European nations because of the demand slowdown.

Some of the energy intensive sectors, where India seems to have an advantage in the near term include, organic chemicals, flat rolled steel products, ferro alloys and specific engineering goods like transmission crank shafts, engines & motors and bearings.

 

Having said that, in the long-term with right policy decisions, technological collaboration can be promoted to attract manufacturing of energy-intensive sectors to India.