ETMarkets Smart Talk: Markets@highs! Siddhartha Khemka decodes which sectors are worth investing in now

“Sectors like chemicals, pharma, electronics, automation, and textiles are likely to see a lot of export prospects unfold,” says Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services Ltd.

In an interview with ETMarkets, Khemka, said: “Over the long-term, export-linked sectors are expected to perform well, though, in the near term, due to the global slowdown and currency depreciation, the export sectors may remain under pressure,” Edited excerpts:

Sensex, and Nifty50 created history in November. How should investors now play markets?
The Nifty50 after its recent rally of ~10% over the last one and a half month seems to have taken a pause and is consolidating near its 52-week high levels.

The overall trend remains positive as the earnings growth momentum continues to remain robust, amidst a volatile global macro environment.

For Q2FY23, Nifty companies grew by 9% v/s expectations of flattish earnings. Excluding the global commodities such as metals and oil & gas, the growth stood strong at 33%, led by BFSI and auto.

Going ahead, we expect this momentum to continue with the Nifty50 earnings CAGR of 17% over the next 2 years.

The oil prices have corrected by ~10% and have fallen below $90bbl which is positive for our oil import-dependent economy. Even the wholesale and retail inflation has cooled off and is showing signs of peaking out.

Thus, the margins that got hit for the majority of the corporates is likely to start improving from H2FY23. At the same time, the festive season this year witnessed a buoyant demand – being the first one without any restrictions post 2 years of covid.

The buoyancy in demand is expected to continue with the onset of marriage season. Apart from this the bank credit continues to grow in the late teens over the last few months and is expected to continue this uptrend with the pickup in CAPEX from H2.

The recent rally seen in the Indian market stands out when we compare it to EMs. The rally also makes Indian markets slightly expensive compared to global peers. Will India be able to hold on to the outperformance?
In the last 3-6 months, Indian markets have outperformed global markets by a sharp margin given its strong domestic macros. The Nifty gained 3%/16% over this time frame as compared to single digit fall for the majority of global markets.

However, over the last month, with the cooling off of the global inflation, the hope of a slowdown in the US Fed’s aggression has led to some catching up by the global markets as they rallied in mid-teens vis-a-vis 7% gain for the Nifty.

The Nifty recently touched 18,600 levels, and at this juncture, the index now trades at 20x 1-year forward earnings which is comfortably near its long-term average. Going ahead, we believe the overall trend would continue to be positive given comfortable valuations, strong earnings growth potential, and robust domestic macros.

However, intermittent volatility cannot be ruled out, till the global macros stabilize.

As Indian markets on the verge of creating history where do you see the next set of leaders emerging from?
Capital goods could be one sector that might give the next set of leaders. As the government is pushing Capex and laying a lot of emphasis on domestic manufacturing, capital goods companies might see an influx of lot many new orders which would boost their profitability.

With realty at the cusp of new upcycle, real estate players and especially building material companies are expected to do well.

Banking credit is witnessing strong growth and it is expected to gain further momentum with capex cycle gathering pace. This along with improving asset quality would provide fuel to their earnings growth.

Apart from capex and credit growth, consumer discretionary is another theme which is witnessing exponential growth, be it travel & tourism, retail, QSR, etc. especially post two years of covid restrictions.

Recently, PSU as well as Rail stocks have picked up momentum. What is driving rally in these 2 sectors?
Credit growth has entered a new upcycle with the banking system seeing healthy systemic loan growth of higher double digits for the past few months, driven by continued momentum in Retail, SME, and Corporate segments.

BFSI Profits saw a jump from Rs60k crore in FY19 to Rs1.5 lakh crore in FY22. The momentum continued in H1 with earnings in both quarters being driven by the BFSI sector on the back of healthy loan growth, margin expansion, and continued moderation in provisions.

The improvement in fundamentals was more profound in PSU Banks which along with low valuations led to sharp outperformance in them vs private banks.

Going ahead too, continued improvement in asset quality and robust traction in credit growth would act as catalysts for the PSU Banks.

Rail stocks also have picked up momentum recently as the next 10 years is likely to see a very high level of capital expenditure in the railway sector in order to accelerate the capacity significantly.

Further, the government is looking at divestment in some of the listed rail PSUs which is also keeping these stocks abuzz.

Should one consider rejig their portfolio as markets create history?
There is a lot of frequent sector rotation being witnessed in the market. Thus, with the market being near its 52-week high, and about to touch its peak, one should review the portfolio carefully and realign according to sectors that are likely to drive the next leg of growth.

From a portfolio perspective, we are over-weight on sectors like BFSI, auto, and consumer and would look at adding IT post the recent correction. We continue to be underweight on pharma, oil & gas, and utilities.

Now that bulls have again taken control of D-St do you see more IPOs making their comeback to D-St? We have already seen a few in Oct-Nov. Any particular IPO(s) which you are looking forward to?
It has always been seen in the past that IPOs make a strong comeback whenever the market is in an uptrend. This was also seen recently when IPOs which took a complete halt in June-July this year resumed in August with a market trend reversal.

It further gained pace in the last one month when the market rallied by 7%. Over the last month, we saw as many as 9 companies coming out with their IPO offers with the rally in the secondary market.

Going ahead too, the pipeline remains strong with prominent names like Go Airlines, Keventer, VLCC, Aadhar Housing, etc.

How do you see export-linked sectors faring in the near future?
India’s exports saw tremendous growth over the last two years and reached $418bn in FY22, on the back of a significant push to manufacturing.

It is expected to touch $1 trillion by 2028 – driven by various government efforts like PLI, Make in India, etc. to capture China+1 and now Europe +1 opportunity.

Sectors like chemicals, pharma, electronics, automation, and Textiles are likely to see a lot of export prospects unfold.

Thus, over the long term, export-linked sectors are expected to perform well, though, in the near term, due to the global slowdown and currency depreciation, the export sectors may remain under pressure.

Your biggest upgrades or downgrades post Q2 results?
Q2FY23 came in marginally above estimates amidst a tough global macro backdrop, thus acting as a saviour for the markets. It was largely driven by the continued strong performance of Financials and lesser-than-estimated losses in OMC’s.

Earnings growth for Nifty stood at 9% v/s expectations of flattish earnings. The performance was sharply dragged from global commodities such as Metals and O&G, which declined a 67% and 29% YoY.

Excluding these, Nifty posted a solid 33% earnings growth v/s expectation of 28%, fueled by BFSI and Autos. Excluding BFSI, profit fell 3% YoY v/s estimate of an 11% decline.

Going ahead, as the benefit of the recent cool-off in commodity costs start accruing in 2HFY23E, we expect other sectors to contribute too to the corporate earnings. Overall, we expect the earnings growth trajectory to remain strong at 17% CAGR over the next two years.

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