FMCG to emerge as a defensive in medium term; in IT, largecaps better placed: Shibani Sircar Kurian

If IHCL’s performance was anything to go by, clearly travel and tourism is a theme which is here to stay for the long haul?
One trend that we are seeing incrementally, where rural is concerned is that it appears that some of the impact that we saw during the Covid period in terms of slowdown on the rural side seems to be bottoming out. It is true that the improvement is not a sharp V-shape recovery that we have seen in the urban discretionary consumption space but if we track a little bit of data in terms of how rural wages are panning out, what is the trend that we are seeing in terms of employment generation, especially where demand for NREGA jobs typically goes up when other sources of employment in the rural segment are low, has been coming down?

Also, if we look at sowing pattern for the rabi crop, which gives expectations of improvement in terms of cash flows. Our thesis and belief at this point in time gauging the data that is presented in front of us is that, we are possibly starting to see some improvement where rural economy and rural demand is concerned. Therefore from an FMCG sector perspective, we believe it bodes well in terms of volume growth.

Also Read: In near term, earnings are the predominant driver: Shibani Sircar Kurian

All of last year, whatever growth that we saw on top line where FMCG is concerned was predominantly driven by pricing and price hikes and the volume was muted. We believe that at the margin, it should start to change where volume growth starts to improve.

Secondly, the sector will benefit with tailwinds of cost reduction that we are seeing, which should play through in terms of gross margin expansion for the sector resulting in overall profitability.

In pockets, we are seeing valuations with respect to long-term average levels being fairly reasonable and therefore FMCG as a space is something that we believe over the next few quarters or over the medium term could be a good defensive from an overall market perspective.What is the outlook in terms of the kind of view that we have seen on the entire IT space given that globally the tech rout seems to be baked into the price? We are seeing IT coming back into favour? The numbers also are out of the way. What’s the view on IT?
We spent a lot of last year being underweight on IT as a sector primarily on account of the fact that the revenue growth trajectory was showing signs of slowdown and valuations were expensive. Now we have a situation where valuations have corrected sharply, coming back closer to long-term averages, especially for the largecap names, while some of the midcap names still trade slightly above long-term average levels.

In terms of IT as a sector, we have to break it up into two parts; on the revenue front, clearly there is some degree of impact because of the global macro headwinds that we are seeing today. However, the impact may not be as sharp or as bad as was earlier feared, given that now it appears that while growth is slowing down, it is not a hard landing of sorts.

Therefore, yes, there is a slowdown, but it is possibly not as bad as what was earlier feared. During Covid, there was a situation where revenue growth for most IT companies went up significantly, and now we are seeing a situation where revenue growth comes down to long-term averages or slightly above long-term averages. That is something that is now getting factored into valuations.

On the margin front, we believe that margins have bottomed out and should start improving, especially as attrition and wage cost pressures start to abate. At the margin for the sector, we believe that given that there are certain uncertainties specifically to the macro headwinds, there are issues in terms of discretionary spend. Companies are focusing more in terms of cost takeout deals, as well as the kind of momentum you saw in terms of deal-wins, especially with short cycle deals, that momentum has slowed down.

In terms of the sector, we believe that the larger IT companies which are trading at valuation which are more favourable in terms of long-term average levels appear to be better placed than midcap IT. where you still have client concentration. you have certain sectors or verticals which are impacted because of slowdown and slower discretionary spends.

Right now, we believe that valuations are much more favourable than what it was six months ago, but our preference has been for largecap IT over midcap IT, stocks.