India on track to deliver mid teens earnings growth in medium term: Shibani Sircar Kurian

“We have been very structurally positive on the domestic cyclical and the industrial space. Manufacturing, industrials and infrastructure are segments where we are overweight on our portfolios and we have been so for a while,” says Shibani Sircar Kurian, Senior EVP, Fund Manager & Head -Equity Research, Kotak Mahindra Asset Management

The cool off in commodities has suddenly given a lot of hope. People in the market are now asking whether the RBI is going to hold rate hikes this time? How do you play this cool off as it is clearly going to have an effect on inflation too?
There are two critical factors that the market will watch out for; the trajectory of commodities as well as oil prices and in turn the bearing that will have on inflation as well as interest rates.

The second will be the global growth outlook especially in the US and Europe. The way we are approaching markets is that if this kind of movement in terms of commodity prices continues, in the second half of the year, the focus shifts away from inflation and interest rate hikes more towards growth and that is where India will possibly fare favourably in the global context.

From the earnings perspective, India appears to be fairly well on track to deliver mid teens earnings growth in the medium term. Of course, the immediate quarter which is the first quarter of FY23, will see some degree of margin pressures manifesting because of input costs. On an absolute level, Nifty valuations have now come down close to average multiples on a relative basis. However, valuations still remain elevated and that is going to be one of the key drivers, especially if the FII flows are concerned.

So, maybe some amount of volatility still continues in the near term. However, our hope is that the second half of the year will be far calmer than what we have seen in the first half and our approach to the market has been bottom up in nature. We believe that this is a good time to look at companies where valuations are reasonable, companies which are good businesses and market leaders in their segments and also have deleveraged balance sheets and strong cash flows. That is how we are really approaching markets currently.

Is industrials a space that could outperform this year because we have got a lot of false starts in terms of the capex cycle but it usually fizzles out?
We have been very structurally positive on the domestic cyclical and the industrial space. Manufacturing, industrials and infrastructure are segments where we are overweight on our portfolios and we have been so for a while. We believe that growth and public capex will continue on the fiscal side while there are some pressures but it appears to be manageable and therefore we expect the capex spend that has been budgeted for will possibly continue and therefore segments such as the roads, railways, ports, water these are segments where we will see continued spend. In terms of overall capacity utilisation levels in a few industries such as cement and metals we are seeing that capacity utilisation levels are such that incremental capex announcements have been made.

Thirdly, manufacturing is clearly benefiting from supply chain shifts away from China and we are seeing that in terms of order flows, growth in industrial consumers will continues to be fairly strong. The entire policy focus is also favourable for this pack of manufacturing industrials and infrastructure and therefore this is a segment where we continue to be overweight and this is one of the key themes that we are playing across our portfolios.

I am wondering why there is sudden enthusiasm across autos. The commentary from Tata Motors on the sidelines of the AGM seemed all fine but why an across-the=board move on Eicher, Maruti etc?
For autos, in the very near term, commodity cost cooling off bodes well for the sector as a whole as input cost pressures start to moderate. Remember, some of the companies have already started taking price hikes and therefore as input cost pressures moderate, at some point in time, margins become favourable. So that is one aspect.

Also what we are seeing is that after almost four-five years of very low growth and muted outlook for the sector, we are trying to see where the growth rates start to normalise and some amount of that replacement demand coming back.

The other factor to watch out for in this space is the chip shortage issue and if the chip shortage issue starts to abate, then again that is going to be a key driver. Overall for the segment, especially in passenger vehicles, incrementally inventory levels in the system are extremely low, demand is actually holding up fairly well as oil prices correct, from an overall cost of ownership perspective, that bodes well for the sector as a whole.

While some of this near term supply side challenges remain, but from a sector perspective, we are very positive on autos, especially on the passenger vehicle segment where we see a disruption, are least in terms of the entire EV disruption, which is more prevalent in the two wheeler segment.

We are also looking at companies which have a strong product launch pipeline, companies which are now looking at essentially executing well and have strong executional capabilities which have been demonstrated in the past. This segment is looking fairly attractive at current valuations.