Let us just get an overall sense as to what you are looking at when it comes to the market landscape at the current juncture. Do you believe that as of now the undertone of the market is remaining quite positive but global headwinds, the overall valuation as well as concerns of the macros is putting a bit of a concern on the markets in terms of the undertone being a little bit cautious?
Yes, we are still not bullish on the market as yet, but honestly we are also not as negative as we were, let us say, at the start of the year because we have been through a fairly substantially long period of time correction.
India has been largely flat for almost a year or so and over the last six-nine months we have also underperformed markets like Hong Kong, China which had underperformed earlier.
So, global flows are also slightly more positive on India given the time correction and valuations and meanwhile the earnings growth in India for the corporate earnings growth, they have actually held up reasonably well despite the ongoing consumer slowdown, despite the global issues, etc.
So, you are absolutely right, we see two major issues on the downside. One is the global slowdown and the uncertainty around. Therefore it remains to be seen how the Fed would react both on the inflation front as well as financial stability given the recent regional banking crisis.
And second is just domestic factors like monsoons, for now, the fear has sort of subsided given the IMD’s forecast but we would not really know until May, June and also we need to watch out for the distribution and the timing of the monsoon as well so it is not just the quantity and that obviously still has an important bearing on certain sectors.
But, overall, the medium term outlook on India remains very-very positive and we are one of the few countries, EMs in the world, where political stability is there and the corporate sector has deleveraged, banks have cleaned up their act, they are well capitalised, so to that extent we are quite well positioned for an up cycle but just not as yet is our view, therefore this year we think earnings will still be somewhat subdued.
At Kotak in our estimate FY23 will end the year roughly at about 11% earnings growth for the Nifty and in FY24 we will end up at 13.5-14% for the Nifty and FY25 we will see a little bit of a pickup going up to almost 16%.
So that is slightly below consensus but our concerns are around the ongoing consumer slowdown, the global slowdown, some of the export oriented sectors, you could see further cuts, we saw that with IT for example, so those sort of concerns. And in India valuations are still on the higher end, we are still at 19 times FY24 earnings as far as the Nifty is concerned, 17 times FY25. So, it has become more reasonable compared to 3-6 months back, but we are still not cheap enough.
Cannot help but talk about IT, considering we were just chatting with the TCS management and while they still see a probability of a double-digit growth in FY24, they are only at best confident about UK, say US is still pretty much nimble and there are increased risk aversion and caution in the spend segment in the near term. Can IT really pull a rabbit out of the hat and can it do the trick after stark underperformance of late?
I think the most important thing to keep in mind is that this time around the IT downturn, even if the US slows down quite sharply, which is not our base case and especially given what the markets are pricing in globally, we do not think the Indian IT companies this time around will be as badly impacted as we saw in, let us say, the 2008 crisis or even going back 25 years.
While there is clearly the issues of the regional banking crisis and there is a slowdown in some discretionary spending, decision making is taking longer, deals are taking longer to close, there is very little pricing power, if at all, but the benefits are also that attrition rates, wage hikes are coming off and I think more importantly, this time our companies in India have gotten the scale, they have really beefed up their capabilities.
Our Indian IT companies are relatively well positioned to help their US customers take out costs, as well as the ongoing stuff like cloud migration and apps for the cloud and later on we will soon have AI and machine learning also picking up.
So, our companies are quite well positioned. There will potentially be some more downside if the US downturn gets worse, but that is not our base case for the time being.
But then where is it that you are seeing value when it comes to the various sectors, how is it poised, is it the likes of autos, etc, which is likely to do well? Are you expecting a bounce back in consumption? Where do you see value the most?
The only sector where we still see some value is the financials. I know it is a consensus view now across the board and the sector is reasonably heavily owned. But nonetheless, that is the only sector where valuations, even on a pre-COVID basis, are still somewhat reasonable compared to the rest of the market. They are still somewhat reasonable compared to the growth and ROE prospects.
And given the sort of likely pause in rate hikes, we think the RBI will stay on a longish pause.
Globally, the markets are pricing in that the Fed will hike only 25 bps next month and after that again there could be even rate cuts going forward. So, banks, we think are still looking quite good. Loan growth may slow down slightly but hopefully not too much is our view given we are not assuming a bad monsoon, we are not assuming a very sharp global slowdown and also credit costs will likely continue to come off a little bit, margins may come off slightly but not too much. The NIMs and therefore banks still look good in the overall context. Even the NBFCs, given that perhaps the worst of the interest rate hike cycle is over.
So, we like the private banks, even some PSU banks, the NBFCs, more the auto-focussed NBFCs rather than the consumer-focussed NBFCs.
Consumer sector generally is either still expensive or we see more risk of earnings downgrades given the ongoing consumer slowdown, and there is no sign of any imminent recovery. This slowdown can carry on for a few more months or a few more quarters. Very tough to figure out when the recovery will happen. No signs of it as yet. So therefore, really, banks and the financials.
Second category, I would say some of the smaller sectors, there are pockets of value in real estate for example, more residential real estate. Then there is hospitals, telecom in a few cases, and so on. So, by and large, the market like I said is still not cheap enough. It is getting cheaper, it has become more reasonable. But are we cheap? No, not yet.
