IT Stocks | Vehicle Stocks: 15-18% earning growth unlikely this year due to margin pressure: Santosh Kumar Singh

February credit growth data again came in at above 8%. Do you think this financial year things could change on the returns front also?
Last year, financials were the area of contractions. This was the area which had seen highest EPS upgrades and this was the sector which actually did not do much; maybe it had to do with the incremental flows where the FIIs were almost selling on a daily basis and this became a collateral damage and even during the Ukraine conflict. These do not have commodity concerns and should not have fallen the way they fell. My view is even next year, the numbers are going to be the best in this particular space and clearly the valuations have become quite cheap for a lot of quality companies. If we are not going to see that sort of selling from the FIIs, this could be one of the best performing sectors in the next year.

What about insurance? That space has also underperformed. A lot of selling has happened. Star Health is saying from now on, they want to be in every district of the country. What are your thoughts on the insurance space?
Insurance is better placed even than banking simply because they had a very bad year last year because of Covid. But whatever said and done, Covid was a one-off issue and I am hoping that this may not return the way the second wave happened because the maximum damage to this sector was done in the second wave.

Now if we do not see anything like the second wave, they are indeed very well placed because people now want to buy insurance. Growth is not that much bigger a problem for that space. Pricing has firmed up a little bit although even re-insurance pricing has firmed up but the pricing overall has firmed up in the retail space.

Clearly that should help the profitability element. In this sector, the valuations are now almost dirt cheap for a lot of stocks. The fundamentals do not demand the sort of valuations they are trading at. This is a sector where a lot of the stocks have more than 20% growth rates and I find this maybe even better placed than the banking sector.

What are your thoughts on the real estate space? The home improvement segment has done very well. But why didn’t housing finance companies do well? Can one look at good opportunities in housing finance now?
Housing finance was another collateral damage because this is part of the financials only and another collateral damage of this overall selling because if housing is going to do well, housing finance has to do well. One of the factors which might have played out was the Covid impact. The hangover of Covid remained till say Q2 of last year and from Q3, numbers started flowing through even in the housing finance.

From Q3, they have started outperforming. Some of the housing financials have started outperforming from Q3. They are very well placed from now on because they might see more recovery actually. I think there is a good case and that is why I am saying the entire financials space is the one which has fallen despite the fundamentals improving and that is where we are seeing a lot of opportunity in this space.

Is there merit in looking at two -wheeler stocks or even passenger vehicle stocks or commercial vehicles stocks with the capex cycle taking off?
I find definitive merit in passenger vehicles (PVs) because we can see growth coming in across sectors because in four-wheelers, we can see growth across other parts of the equation. Is this EV because that is one thing where we do not know the winners in the two-wheeler space because that is where a lot of competition is happening on the EV side and after maybe seven-eight years, we are talking about a large portion of two- wheelers getting into the EV segment.

There’s a confusion in investors’ minds about how much they want to take exposure in a segment where growth might happen but at the same point in time, we do not know who will win because this was a three- or four-player market and it might turn out to be a multi-pronged competitive market. So, two-wheeler is where I would not be that bullish but PV definitely has seen multiple bad years. Now things are falling into place.

For one or two quarters, we might see a margin pressure because of the commodity price hike but I am hoping that this is transitory and they are able to pass on most of it and even the commodity prices might cool off.

What else are you reading and researching these days?We are about to see the start of the earnings season. Did you manage to analyse something new, something interesting in the last couple of weeks?
The interesting part is only coming from the fact that after some quarters of earnings upgrade, we might see downgrades coming in from the next quarter. That is one or two quarter of downgrade because of the commodity price pressure. That is the only thing which we are trying to understand and that is this going to be a transitory one quarter or are we going to see multiple quarters or is the story getting broken? The current view is that this is going to be transitory because it is more of a one-off event. That is the key part we are trying to understand.

How is the earnings trajectory looking for largecaps, midcaps and smallcaps after reworking the numbers on margin pressure? For the next two-three years, does the blended earnings still look 15-18%, closer to 20% or will they need to be worked lower?
For the next year, 15-18% might require a little bit of tampering because one or two quarters might see margin pressure but our expectation is simple that this is an one-off event and we might not see the oil prices or the other commodity prices at such an elevated level for a very long period of time.

In the short duration, one cannot pass on everything and that is where the margin pressure will be seen next year. So we might have to tamper our earning upgrades a little bit but it is a passing phase and we do not see an escalation. For the next two years, 15-16% earning growth should happen and that is what we are working with.

Have you built in the defensive part of the market into your portfolio strategies? Have you gone overweight or are you keeping a very nice chunk in pharma and IT as well?
Yes so see IT definitely has been one where we have been all bullish and we remain bullish but the valuations are telling me that this may not be the time to remain highly overweight in that sector. We might want to get equal weight or somewhere around that.

Pharma valuations are actually quite good and one might want to go overweight on some of the pharma companies. Both IT and pharma are defensive but personally I prefer pharma to IT.

Do you think the midcap and smallcap universe is offering value once again for stock picking? Or do they need to go down another 10-15% before they become a good value zone?
Value is there in small and midcap space. It is more a case of bottom-up stock picking. Among small and midcaps. there is value in a lot more companies than what we could see in October-November. We see a lot more value in a lot of stocks and that is definitely there.

In the near term I would prefer largecaps more than smallcaps and midcaps because even the largecap valuations have eroded and the first phase will be more largecap driven, followed by mid and smallcap rally. But the midcap and smallcap space is a lot more bottom up and one has to be more stock specific.