By Manish Jain
The ongoing result season (Q2FY23 results for Indian equity markets) have proven to be quite interesting. The season has witnessed quite a strong earnings growth momentum so far, which has been fairly surprising. IT, Auto, BFSI and Consumer Discretionary have witnessed fairly strong earnings growth (relative to expectations) while global commodities have witnessed a sharp deceleration in growth due to volatility in prices.
However, the more interesting aspect is that while a majority of the Nifty companies (amongst those who have reported so far) have either witnessed better in-line results as compared to consensus expectations, the earnings upgrade in Nifty has been fairly minimal. We believe markets are waiting on the sidelines for global cues and flows to take a definitive direction. In this respect the upcoming Q3FY23 results gain unprecedented importance as they will give several due regards – domestic consumption, rural demand, margin pressure and impact of global slowdown on earnings.
Amongst the various sectors, IT services reported quite a strong set of numbers. Contrary to street expectations the developed market portfolio (USA & EU) have not witnessed any material slowdown. The margin outlook is improving due to the combined effect of depreciating rupee and material improvement in the attrition situation. The surprising thing is that despite an encouraging set of numbers, the IT index continues to languish at the bottom of the table.
We believe that the markets are waiting for the management commentary post the upcoming Q3FY23 results to properly gauge the impact of the global slowdown. However, we continue to remain optimistic about the sector and believe that with a 2-year time frame in mind, these are the correct levels to look at these businesses in a positive manner.
Banks again beat expectations by a wide margin. Contrary to all expectations, loan growth has accelerated despite the tightening by RBI. Moreover, there has been a minimal impact of the same on asset quality. We believe that NIM expansion can potentially continue for a couple of more quarters and with inexpensive valuations & strong loan growth, there is a strong buy case for banks. The only issue that we continue to keep a close eye on is the liquidity situation. CASA ratio across all players has gone down and deposit growth continues to lag behind. That apart, banks should continue to flourish through the next few years.
Auto stocks are now finally coming out of a low cycle after almost 5 years. The raw material price situation has improved considerably, price hikes have happened and more importantly, valuations still remain comfortable. We believe that strong underlying demand is a testimony to the fact that this is a start to what is going to be a strong multi-year cycle.
Overall, we believe Q2FY23 has shown that the domestic economy remains on a very strong footing. Demand is gaining momentum, inflation is under control and government finances are quite comfortable. Overall making India a very compelling investment case against all the other emerging markets.
(Manish Jain is the fund manager, Coffee Can PMS at Ambit Asset Management. The views expressed are author’s own.)