hozdar: ETMarkets Smart Talk: Auto, industrials and consumption sectors could benefit from margin expansion in FY24: Kaizad Hozdar

In an interview with ETMarkets, Hozdar said: “We continue to keep faith in the financial sector as it is seeing improved traction in credit demand and minimal bad debt worries,” Edited excerpts:

There are many external and internal headwinds for equity markets. Where do you see D-Street headed in FY24?
At current levels, our market is trading below 1-year forward average P/E multiples. Since the past two quarters, we have not seen any upgrades in the Nifty earnings post results.

Global markets too are facing recession headwinds and global GDP growth is likely to be at multi-year lows in CY’23. That said, we have undergone a reasonable time correction of a year and a half.

This will likely cushion the market from a deep correction in FY24. Given this scenario, we believe the market could try one’s patience in the year ahead.

The best strategy in such a scenario would be systematic/regular allocation to equities and thus get positioned for reaping the fruits of an eventual recovery.

This we believe will help the investor navigate these fleeting bouts of optimism and doubt. Which sectors are likely to hog the limelight in FY24 — and why?
We continue to keep faith in the financial sector as it is seeing improved traction in credit demand and minimal bad debt worries.

We also believe sectors like auto, industrials and consumption could benefit from margin expansion over the next few quarters given the slump in crude, metals and freight rates albeit volume growth could be tepid.

Any sector which could turn out to be the dark horse?
Equity investors would be better off focusing on pockets of domestic growth vs. export-driven companies where the outlook is hazy.

Rather than focusing on a dark horse sector, we believe the theme which could play out generally over a number of sectors could be the expansion in profit margins in FY’24 given the emphatic reversal in commodity inflation, be it crude, metals, minerals and freight/charter rates.

The winning sector will eventually be the one where the margin expansion gets coupled with demand recovery leading to enhanced bottom-line growth vs. top-line growth.

Cement could be the space to watch out for as regards the mean reversal of margins in FY’24 coupled with reasonable volume growth given the emphasis on infrastructure creation in the budget.

Will the next decade belong to companies operating in green energy?
In the Asia region, apart from China, India stands out in the speciality chemical space due to its strong chemistry skillsets which have been proven especially in the generic pharma space over the past two decades.

There are a disparate number of listed chemical companies each catering to a niche segment and provide an option for developed world markets to diversify their procurement base for raw materials.

As regards EV space, there is no such niche differentiation. In fact, the technology to manufacture EVs is simpler than that of the existing internal combustion engines (ICE).

As a result, we are seeing many 2W EV manufacturers vs. just a handful of existing ICE 2W manufacturers. Thus, although EVs are rapidly gaining ground, it is hyper-competitive and the likely winner could probably emerge from the EV ancillary space.

Green hydrogen is a clean fuel with almost no emissions and has a relatively high energy density by weight vs. petrol/diesel. The Indian government believes green hydrogen can be a decarbonisation tool and has released the National Hydrogen Mission in Jan’23. India aims to produce 5mnt by 2030 to enhance its renewable energy base.

The usage could range from transportation to fertilizer, refineries, and the steel industry. Currently, green hydrogen is not an economically competitive solution and is an evolving industry that will need scale and a number of government incentives (akin to EVs) to turn competitive by the end of this decade.

How should one play small & midcap stocks in FY24?
The global growth outlook for CY’23 has been dented due to the troika of a) inflation, which remains outside the target range of most central banks, b) rate hikes, and c) slowing consumption.

Given this reality and the fact that we are not seeing imminent signs of reversal in these factors, we believe a measured approach towards mid-small cap investing should hold well.

The valuation comfort too is currently in the large-cap space given the fact that the current one-year forward P/E multiple is lower than the historical average while the same is not the case in the mid-small cap space.

How should one avoid catching a falling knife?
Stocks that are going south need to be seen from two angles; firstly, businesses that are in a structural downtrend (internal combustion engines, auto lubricants, coal-fired power plants) or which are being discouraged by government policies (polluting industries).

Such underperforming stocks need to be exited for obvious reasons. The other set of underperformers pertains to companies that could be undergoing a cyclical downtrend.

If the investor has a long-term view, it makes sense to sit through the downturn and exit the stock when the uptrend in the business cycle is peaking out.

Certain businesses inherently have poor financial metrics (low ROE, high debt) like power companies, oil refineries etc. Such companies too should be exited as many of them are also susceptible to frequent policy changes by the government.

These pointers can be used as guides to avoid seeding at source-falling knives in one’s portfolio.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)