Inflation, especially in the US, will be one of the key variables to watch out for this year, says R Venkataraman, chairman, IIFL Securities. In an interview with Ashley Coutinho, he says the markets could rally if inflation plummets globally and central banks cut rates sooner than expected. Edited excerpts:
What is your outlook for Indian equities for CY23?
The outlook is reasonably positive. The actions of the US Federal Reserve will play a key role in how things pan out. Domestically, rural indicators are looking up, with the rural real wage growth turning positive. MNREGA employment stays low at 26 million. The government’s road construction is a thrust for rural labour demand. Secondly, general construction activity has risen. We can see this in strong tractor and truck volumes. Industrial credit is yet to pick up, but the credit demand is in the mid-teens, led by housing and personal credit. Incrementally, the most important variable is inflation, especially in the US. If the US Fed does not tighten aggressively, we could see the Indian economy avoid a slowdown. Else, as witnessed in Q3 results, discretionary sectors like white goods, four-wheelers, higher-end consumer electrical and paints will hit a volume speed-breaker.
Indian equities seem to be richly valued at this juncture. What is your take on valuations?
We like select private and PSU banks as they have been hit by slowdown concerns, and worries about exposures to the Adani Group. We like Axis Bank, HDFC Bank and Equitas Small Finance Bank. Trucks and tyres (Balkrishna Industries and Apollo Tyres) look attractive. In IT, we would stay marginally underweight, but with Infosys as the top holding. We like Indigo as it has been hammered by promoter stock selling and is looking very cheap and with very strong operational fundamentals. SBI Life also looks very interesting as concerns around the imposition of tax on income from higher-ticket schemes seem overdone.
FPIs have sold shares worth over $2 billion in 2023. What is the outlook for flows going forward?
MSCI China index has already jumped 60% from levels of around 45 to around 72 now. Incrementally, valuations may not look that attractive. India has also seen some multiple compression and is now trading at 18.5x FY24 estimated earnings. So, we do not see China’s revival as the main risk. Rather, we see inflation plummeting globally and central banks cutting sooner than the market thinks, which can trigger a rally.
What impact will the T+1 settlement have on FPI flows?
We don’t see any major impact as these changes have been happening and bring settlement closer and closer to real-time over the years and FPI investments into India have only increased.
What are the key trends that you see for the broking industry this year?
Technology and innovation will remain the key focus areas. Revenue is likely to be impacted for the broking industry as a whole. In terms of products, mutual funds, ETFs and standard portfolios will likely gain prominence.
The regulator has taken a number of steps to ensure that the client money is not misused by brokers. How will this impact brokers?
The float income will reduce for brokerages.
What is your assessment of the December quarter earnings season?
The third quarter saw an aggregate sales, EBITDA and PAT growth of 16%, 11% and 17% on a three-year CAGR basis for a sample of 296 companies out of the BSE 500. However, on a Y-o-Y basis, EBITDA and PAT contracted by 4% and 2%, respectively. Banks, autos and capital goods reported a good set of numbers, while retail, consumer discretionary, building materials and consumer goods fared poorly. We see downgrades continuing as discretionary slowdown are still not priced in.
The private capex cycle did not take off as expected in FY22 and has lagged government capex during FY20-22. How long before things turn around?
Capex in India is roughly split 40-40-20 between the private sector, SMEs and the government. Government spending has been strong, but SME spending should start as they have got the best access to credit, with GST, IT and other systems serving up processed information to lenders and enabling better and faster credit underwriting. Private sector capex should accelerate in FY24 as corporate and bank balance sheets are in good shape. The trigger can be a global investment surge on climate change. Government capex being only 20% is unlikely to swing overall capex but can provide a fillip to infrastructure availability in the country and increase returns to private capex.