We are still underweight on IT, pharma sector: Mahesh Nandurkar

I am assuming that in 2023 a lot of macro headwinds will start receding if that is the underlying framework are we in for a good comeback year?
Yes indeed 2022 has been a year with a lot of macro concerns and I think you are right in stating that the macro concerns are slowly abating.

We have already seen nearly 80% or 85% plus of the Fed rate hike cycle already in place.

So yes I think one of the biggest worries of the rate hikes is now clearly behind us and we are talking about rates peaking out in the first quarter March of 2023. There are some possibilities I would say small possibilities of rate cuts in the second half of the fourth quarter of the calendar year and so to that extent I would say things would slowly begin to normalise after the March quarter.

Whether we are in for a big comeback I would say that at this point in time the downside appears to be limited. We have been cautious on the markets for almost a year and the markets have been more or less flattish hugely outperforming the rest of the world.

It has been a great experience for the foreign investors as well. From here on we do not expect very very strong market because the valuations are still on the higher side and there are still some small global headwinds around but I think the downside appears to be limited for sure and I think probably it is going to be a buy on dips market.

When you say downside is limited and valuations are high put in context for us if valuations are high then why downside is limited?
Downside is limited because incrementally the big risk is behind us. Usually we have seen historically that increase in the rates are associated with the PE multiples going down which actually did happen for many global markets. But Indian markets obviously have held up very very nicely thanks to the domestic flows. But what is outstanding in terms of the risk is the global recession. The hard landing risk in the US is probably still there and there is still debate happening on that front. So that is why I mean by some small risk still outstanding. So basically the reason for the risk being limited on the downside is that the rate hike risks are behind but probably the hard landing risks are ahead of us so in that sense there is probably a bit of a small downside but not a large downside and I would actually use the dips if any to add here.

What is the benchmark when you say valuations are high are you using history as a benchmark? If you are using history as a benchmark is that the right framework because historically we have never seen a scenario like this where China is slowing down, US has its recessionary problem and India has got a solid balance sheet both on the corporate end and the retail end. So will it be a good idea to look at past and judge the future?
Yes, the thing is that over the last 10-15 years the average PE multiples have been going up. So you are right that we cannot really compare what happened 20 years ago and 25 years ago that is not a benchmark anymore. But I think last 10 years is still a good benchmark and the reason for that is last 10 years globally we have seen liquidity being quite high and we have been in an environment globally where bad news economically was considered as good news for equity markets.

Bad news is good news that is what has been the mantra for the last 10 years or so. I think we are still in that phase because the economic upswing and the rate hike is now behind us.

So to answer your question I think the broad set up that we have seen over the last 10 years is still continuing and so to that extent we cannot look at 15, 20, 30 years ago what happened then but I think last 10 years is still a good benchmark according to me.

What I also see is that Jefferies has underweight calls on , as well as what is the rationale?
I cannot talk about the individual stock here but what I would say is that in general our stance still remains quite positively inclined on the domestic sectors. So I think you are referring to our model portfolio and over there we continue to remain overweight on domestic sectors like banks, property. We are overweight on consumers, consumer staples and industrials. So we are quite optimistic on the domestic recovery.

In India we are still talking about if not seven may be like 6% kind of a GDP growth which is still a very good number. We look at corporate earnings growth on the domestic side to be around 15% mark. But we are still underweight on IT, pharma, and some of the external sectors.

Can I also ask you what Jefferies take would be overall as far as PSUs go. The reason I ask you this is that we started seeing in the pandemic onwards how an SBI for example really-really outperformed this year?
I think this year we have seen globally the value trade playing out quite well. Particularly talking about the PSU banks and PSU financials space in general that looks quite attractively valued here. What we have seen is that the state owned banks and the state owned financials have been able to bridge the performance gap with their private sector counterparts.

While the private banks are going at about 20% on their top line, the state owned banks growth has moved up to about 15% range. So that is a 5 percentage point gap still but it is much smaller than a 10 percentage point plus that used to be the case a few years ago.

Also many of the state owned banks were severely impacted because of the NPL cycle. Now that is clearly behind us and the credit costs are going down sharply so that is clearly a big relative positive as well. The third thing is that the credit to deposit ratio for many of the state owned banks is still on the lower side which means that with the relatively smaller deposit growth they are able to support a higher credit growth. That is an important consideration to keep in mind because in the current market environment now the deposits are actually to some extent constraining the credit growth.

I believe that the state owned banks and state owned financials are still good buys here at this point in time and some of the banks are looking reasonably attractively even at this point in time.

What is the outlook when it comes to autos? Do you not feel that now some of the semiconductor issues, supply side challenges are now behind us? The road ahead looks fairly resilient for autos or would you say otherwise?


Yes that is right. I think from a longer term perspective the story looks really-really attractive. But I just believe that from a more near term perspective we will have to get adjusted to a slightly more a moderate level of growth and the reason for that is we have seen that after bumper years in IT services in terms of the new hiring, in terms of the salary hikes we are seeing a slightly down beat trend over there.

And I think probably what we are going to be seeing is that a bit of a moderation in the urban discretionary consumption demand and that will be made up for by an upward movement I believe in the rural consumption side.

I think we are seeing some very-very early signs of rural consumption picking up so I would actually say that at the margin given where the valuations are I would tilt in favour of the rural consumption plays versus the urban discretionary consumption plays.

Where do you stand when it comes to some of the new-age tech companies as one remain very selective within the space? Are we starting to see signs of a turnaround?
Yes I think we have been selective and we continue to stay selective in that space because the clouds are still not completely behind us. So I think we need to stay selective. I think the focus would be on the segments where the comparative intensity is not increasing any more and where there is a greater visibility of cash flows turning breakeven. So those are the segments that we have to watch out for. So yes we remain selective for sure.

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