ETMarkets Fund Manager Talk: For markets, sustenance of earnings growth crucial over next few years: Shibani Sircar, Kotak AMC

The $4 billion selling by FIIs has turned India the worst performing market in the world. Do you think this change in the tide will last long and hurt absolute returns for investors?
In dollar terms, Indian equities have underperformed relative to other emerging markets after the sharp outperformance seen in the last year.

However, with this near term underperformance, some of the premium valuations of India over emerging markets have come off from the highs seen last year. Absolute valuations too, have corrected and are now closer to the long-term averages.

On the macroeconomic front, growth in India continues to be an outlier in the global context. Hence, it is possible that while China appears to be attractive tactically, structurally India continues to stand out in terms of growth.

We believe that in the near term, the market may remain range-bound and volatile amid domestic and global headwinds even while our medium term outlook is constructive. It is, therefore, important to look at stocks in sectors where earnings visibility is clear or growth potential is evident.

The Budget has given greater impetus to capital spending. In view of this, which sectors are you extremely bullish on and would look at increasing your exposure?
Like an all-rounder, the Union budget somehow achieved the difficult task of being a progressive growth-oriented budget while keeping the fiscal deficit under control and does not resort to any big populist measures.

From a sectoral perspective, we continue to be positive on domestic facing sectors such as financials, infrastructure , manufacturing , capital goods and automobiles. In terms of domestic cyclicals, given the budget related push, we expect that public capex growth would continue with focus on roads, railways, water and defence.

Do you see a pick up in private sector capex in FY24 in the backdrop of higher government spending?
With signs of improvement in the overall capacity utilisation levels, we do expect that private sector capex would likely improve over the medium term. Further, manufacturing is benefiting from the supply chain shift away from China and Europe.

Given the policy push, we expect core Industrial capex to also recover gradually. The sector benefits from the tailwind of government focus on Aatmanirbhar Bharat.

Investment in new sectors like renewables, battery storage and green hydrogen as well as the move towards indigenisation of defence are attracting investments to meet sustainability goals.

What are your takeaways from the Q3 results announced so far? How do you expect FY24 to pan out for India Inc?
At the Nifty level, earnings have been largely in line with expectations. The earnings have been driven by automobile and BFSI sectors, while metals and oil and gas have been the key drags.

Excluding oil and gas and metals, Nifty 50 companies’ profits would be much better. At a broader market level however, earnings have seen wide dispersion between stocks. Overall, margins appear to have bottomed out with falling raw material prices.

For markets, the earnings trend will have to sustain not just in this quarter but over the next few years too. Some of the key factors to watch out for include trends in discretionary consumption and demand, any improvement in rural demand trajectory and margin trajectory.

So far in FY23, we have seen modest single-digit downward revisions in Nifty earnings estimates while FY24 consensus expectations remain robust at mid- teens earnings growth.

The IT and related sectors are seeing massive layoffs as global growth slowdown risks are emerging. Will this significantly change the investment behaviour towards this sector in the near-to-medium term?
Technology as a sector has been bearing the brunt of a global macro slowdown. Revenue growth which accelerated during COVID, is now normalising to long term averages of high single digits.

The deal mix is changing from short cycle discretionary spends towards cost efficiency led projects and it’s likely that we will see vendor consolidation as well.

On the other hand, margins are likely to gradually improve with lower attrition and wage cost pressure.

Valuations in the sector have also moderated in the last 6 months. At current valuations, for Indian IT, largecaps appear better placed to navigate the industry level challenges than midcaps.

What kind of asset allocation do you recommend investors if one assumes that India will be an underperforming market in the near term?
Investors should continue with a disciplined approach to investments and formulate their asset allocation strategy based on their risk appetite, investment goals and time horizon. In terms of equity, a staggered approach to investments either through STP or SIP route is the best.

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