Summarise the year gone by for us and looking at the trends where are we in terms of macros and valuations? What is in store for 2023?
At the end of 2021 we at least were relatively clear on the scenarios unfolding in terms of interest rates going up in the system as a whole and monetary conditions winding down or tightening. It at least gave us confidence that India would probably be relatively better play and would be able to do a lot better compared to other global economies. As we stand today that has played out quite well during the course of 2022.
As we look into what probably holds in store for 2023, I am sorry to say but we are basically finding it reasonably confusing at this stage in terms of what directions the market can take.
There are several possibilities which come to mind like whether it is going to be a global versus domestic play, whether it is going to be a narrow market versus a broad market and whether it is going to be rural India making a comeback. Also, whether commodity gainers and commodity prices will continue to wind down a little further giving to fillip to some of the companies which have lost out on gross margins.
So there are several of these things which are probably likely to pan out more particularly in the early part of 2023. There are quite a number of open questions which are not fully answered at this stage and therefore we do not really have a choice but to take an approach where portfolios are reasonably well rounded in order to capture most of these or many of these possibilities which might emerge during the course of 2023.
Where do you see the market despite the macro confusion on interest rate? Where do you think in this market there is value and where do you think in this market one should forget value and simply bet on compounding?
Yes, I think the value pockets gradually got exhausted during the second half of 2022 so I really cannot put a finger on to any particular sector which looks like extreme value to me. May be to some extent you know IT is probably getting there or some of the global sectors are getting there and probably we will see that take hold during the course of the first quarter or may be up in the first half of calendar year 2023.
But otherwise I think you are right in saying that it is more about compounding and from here we know that multiples beyond a particular point will find it hard to expand especially keeping the overall monetary conditions in mind.
We do not really have a choice but to look at companies which will probably have those drivers in order to lift earnings growth whether it is coming out of margin expansion or whether it is coming out of capacity expansion or operating leverage. So I think focus is clearly going to be back on earnings growth and earnings compounding over the longer term.
Just wondering how convincing is the entire PSU banking uptick story and whether the best may be behind us because for those looking to invest right now the run up has already been quite sharp?
Yes, so on the last evaluation that we did on many of the PSU banks not just the top tier but even some of the mid tier public sector banks, there is a lagged effect of their improving NPA cycle which still is to unfold in the course and probably that will happen during the FY24 fiscal.
The residual part of that will happen during FY24 fiscal. It is not that it has not been happening but clearly they have lagged in terms of their NPA improvement cycle compared to some of the other top tier private or probably public sector banks.
So I think there is that residual part which is still there which will basically mean that earnings growth for them and book value compounding will probably be a lot better compared to some of the other banks. But of course market to some extent has anticipated that and a good part of it I would say is there in the valuations. We are somewhere little above midway in their valuation cycle and you probably have some bit of steam yet to go and that should hopefully go through during the first half of this year.
What could be the huge risk when it comes to the FMCG sector? Would it be the overall valuation metric, inflationary concerns and would you be cautious on the sector?
We believe that some of these names in the FMCG sector are primed for a gross margin related operating profitability improvement during the course of calendar year 2023.
What is however not fully clear is whether the rural demand will hold up better than before. It has not been as great especially in contrast to urban discretionary demand during the last two years and post Covid. So we expect that some of those conditions will gradually materialise during the course of 2023. The rural top line growths are expected to be a little stronger than what they have been. But at this stage that is not the part of the story as there are divergent indicators around this.
From a profitability perspective it is going to be a little better. So maybe not just for FMCG, I think that will be a situation for much of corporate India in FY24 where you will see top lines actually growing somewhat slower than what they grew in FY23. But bottom lines probably will be growing a little faster than what they grew in FY23. So we are going to have a bit of a reversal in FY24 compared to FY23 in the entire corporate sector behaviour.
In the new year would you be willing to relook at PSUs? We did see a rerating this year whether you were to look at banks, fertilisers, defence and railways? Is this a space that you will look to reconsider your views?
We have been having a decent footprint out there in several of the sub sectors of the PSU basket. We expect that this story probably to get further strength into the next couple of years but that will be strongly predicated and dependent upon whether India can start on a strong fresh investments/capex cycle. It is pretty critical not just for PSUs as a whole, but for everything else to hold up as well because like I said FY23 was a year of solid top line growth helped by base effect but somewhat slower profitability growth due to compression of margins and FY24 is going to be a reversal of that.
So India is going to probably stabilise at a lower level in terms of growth. In order to maintain growth rates, we need to start on a fresh investment cycle for earnings visibility to get stronger for FY25 and beyond.
So I think that is going to be crucial more so for the PSU pack because many of the PSU businesses are in sync with the investment cycle or the overall domestic economic cycle.
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