Market realigning to a more inward focused economy; portfolio allocation has to catch up: Harendra Kumar

The Modi government has completed eight years in office. Since you interact with a lot of institutional guys, how are they rating the performance because a stable market is paramount for prosperity in business?
If you look at the construct of the economy now, it is the government which is doing the big hitting and driving the economy. In a recent round-table with Finance Minister Nirmala Sitharaman, the private sector pretty much accepted that they have not been matching up to the level of contribution of the government.

The government is the most hard working enterprise in the economy today. Be it road building, be it some of the PSUs, be it lending – they are doing the heavy lifting and that is why some of the PSUs currently are the darling of the markets given the valuation where they stand and the kind of growth that they are showing.

One can see that in the defence stocks, in some of the PSU banks and in the power sector as well. That is the underlying construct of how the government is doing and what they are doing.

How do you play the lenders now?
I think the banking sector will have to lead the market over the next six to 12 months, given that the tech sector is struggling at the moment given the outflow of liquidity. So valuation comfort is there for the bank stocks – be it in

, or and even has started to deliver the ROE commitments that it had made several years ago.

The private bank space is comfortable and some of the PSUs like SBI and BoB are well placed. My guess is that over the next six months, the Bankex will lead the market and within that, one can choose. My guess is the value trade in HDFC Bank is right up there. The valuations are extremely compelling. I think going beyond the technical levels of flows in MSCI and the merger, the market seems to have factored in. HDFC Bank on a medium to long term basis, trades at fairly compelling levels for investors to look at.

Last evening. Salil Parekh of spoke with analysts and they said that growth is not a worry and margins have upside, there are certain levers. How do you like the IT space on valuations? How did you read the Salil Parekh commentary on Infosys?
We had a conversation on this. There are two things at play here number one is the $20 billion that came into India after Covid because global liquidity actually flew into the tech stocks and as they withdrew, it came out of the tech stocks.

So the numbers pretty much did not materially change in terms of the earnings of the outlook but it is the PE expansion or the liquidity flow that went in compressed. Even the narrative of the large tech companies over the previous to last quarter, has remained constant.

It is not so much about earnings as much as the PE compression.The PE multiple expansion will only come in if there is a fresh revival of FII flows into India which will per se led into the tech stocks. I don’t think that is going to happen over the next three to four months. We are largely dependent on domestic flows to sustain the market. Now at these valuations, at 25 times forward as well, there is some element of compression on the multiples still to remain. So we are not bottom fishing at the given point of time despite the outlook.

Tech stocks will come back into outperformance or market performance in due course but not in the immediate future. On growth, we have had certain postponements in terms of client execution which could lead to challenges in terms of the PEs or EPS that the companies are reflecting. The level of PE that they trading, the ask on growth is extremely heavy. If there are delays there, the stocks will correct more. The risk reward still has not reached the point where one would be looking for value. My guess is yes the tech is market outperformer long term but is it going to lead the market rally? I would wait and watch.

Let us move and talk about some of the open up themes. Hotel and leisure industry is doing some good volume and margin expansion. The Tata Group is an example. Mr Ronojoy Dutta, the outgoing CEO of , said they also see good volumes owing to their overseas joint ventures now. How are you playing this opening up theme?
This is something that needs market attention. Two sides of the market are global inflation and local inflation. In the Indian markets, that leg succumbed and hit midcaps when the RBI governor said that we are going to have rate hikes.

But the point to note here is whether inflation or rate hikes will damage demand and I think the sense that the market is getting, given the strength in the rural economy or the kind of financial savings that people had over the last few years, the post Covid demand is not going to die down. We are seeing reflation trade in autos, in discretionary spend or even in flying.

The interesting point is even at high flight cost, the capacity utilisation of the airline companies is significantly high. That means demand destruction is not happening and the market is getting a sense of that and buying has emerged in these stocks. So be it the hotel industry, be it the aviation space or the discretionary spend in multiplexes or autos, there will be a revival and that is where some amount of money flow will continue to go in the intermediate apart from banks.

In the last fortnight, three large auto companies – , and M&M –have spoken about capex for the first time in the last five years. What is your thought on the risk reward in some of these auto names? The sector is also coming out after five-six years of down cycle. Do you like it?
We spoke about banks and then there are autos which will also do well in the intermediate. There is no question in terms of value. At 14 times one year forward, most of the stocks are in the value zone. They need to deliver on the top line growth or on the demand front which some of them are demonstrating at the given point of time.

Outlook for Mahindra is quite resilient and also for Tata Motors. Something needs to get resolved on the demand front for Maruti but a huge comfort by investors is the valuation now. So on any surprises in terms of earnings on these companies, we will see a very sharp rally. Autos will get a fresh leg of buying if it is seeing earnings upgrades. That is what the companies are factoring in.

The capex that you will see is actually if you would have heard M&M as well they said their ICE portfolio is pretty much done with. The new initiatives such as new products as well as EVs is something where the market is going to gear towards. So Tata Motors, Mahindra and some of the others have had successful EV launches. We will see more initiatives there.

On the “new energy front” even on solar, ethanol, two wheelers as well as four-wheelers, we are seeing a resistance of the capex cycle. Capital goods companies which will ride on the capex of these consumption companies are hitting higher capacity utilisation as well. The follow-on theme from this is that the capex story continues but to the new energy side and that is where we need to hunt for opportunities.

The return of inflation and rate trajectory moving up is also a sign of growth. Our economy is right now overshadowing all the other economies in terms of growth or even projected growth. How would the stock market read it in your view?
Actually there are two or three tailwinds to the Indian economy in terms of the capacity utilisation. We have seen several industries reaching a level where they will reconsider capex.

Number two, we have become more cost efficient in terms of China with respect to labour and also given the tax rate cut and the PLI scheme. Exports have been quite resilient. I believe that over the next three years, export will become a very dominating theme for the economy and we are seeing initial signs in consumer durable. Textiles is holding very strong and we will also see capital goods exports playing up in a big way with some of the larger MNCs setting up shop, trying to capitalise on the PLI and look at India as an export hub.

The export story is going to become larger. The domestic economy also rides on inflation.

Inflation in the urban economy is a very formal way of transmitting wealth to the rural areas and that is where the resilience continues to grow and which is very positive for the economy. Second, the capex cycle rides on rising rates and to that extent, the chief economic advisor was correct that these are good tidings; there’s good recovery in capital goods, good outlook for exports and a credit cycle which is reviving. Market is just negotiating a small shift in the trend that was there over the last two years and it will realign to the new growth dynamic of the economy which is more inward focused in my belief.

That is where the portfolio allocation has to align up.