Indian equity markets have been volatile for the last seven months, witnessing large swings on both sides amid headwinds from geopolitical tension, high commodity prices and record inflation. Bulls are looking for corporate earnings reports to take the focus away from the inflation surge. NSE Nifty 50 is expected to consolidate between 16500 to 18500 for next few months, said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities. The IT sector looks promising over the long run, and investors should use any dip to accumulate large cap quality IT services stocks. Apart from the information technology sector, financial stocks are set for outperformance, he added. Here are the edited excerpts from Devarsh Vakil’s interview with Harshita Tyagi of FinancialExpress.com.
Q. Where do you see Nifty heading in the next three months? Will we see it rallying towards 18600-19,000?
Sustained high inflation and tightening monetary policy globally are making many market players cautious. Bulls are looking for corporate earnings reports to take the focus away from the inflation surge that has ratcheted up Federal Reserve interest rate-hike expectations and has sent Treasury yields sharply higher so far this year. We expect Nifty to consolidate between 16500 to 18500 for the next few months.
Q. Where do you see the long term potential for a market like India in a 5-7 years view?
India is likely to clock robust GDP growth for FY22 at 8.9%, one of the highest amongst large economies. If global growth conditions were to weaken further, it would impair India’s exports and nascent capex cycle. Structural reforms carried out by the Government would result in higher GDP growth and that would create a multitude of opportunities for investments into India.
A lot of companies have already reported pre-covid level earnings and we feel that the corporate credit growth cycle has started. Despite all odds, the Indian economy is on the strong wicket, as we have seen strong GST collections, higher e-way bill generation, all-time high direct tax collections, and healthy Purchasing Managers’ Index (PMI). All these data points suggest buoyant economic activity. Over the long term – We continue to repose or trust in India’s march towards a $5 trillion economy. Indian markets will also reflect this economic reality and Indian markets have a potential to reach $5 trillion market capitalization in next 5 years.
Q. With high inflation numbers, is RBI expected to hike interest rates in June?
Higher energy costs are fueling inflation across the economic spectrum. Consumer inflation has surpassed the upper band of the RBI’s comfort zone and wholesale inflation running in double digits. This is forcing the hand of central bank’s like the US Fed and India’s RBI to unwound unconventional monetary policies and turn more hawkish.
Q. The new financial year has just begun, what is your outlook on Nifty 50 for FY23?
India’s economic growth is accelerating, which is quite evident from the strong growth in high frequency economy numbers. We consider the current correction as an opportunity to accumulate select stocks for the long term. Corporate earnings remained resilient despite the varied challenges in the third quarter. For FY23, Nifty earnings are expected to grow by 20%.
Q. What are the key themes, sectors and stocks to focus on in the new financial year?
We know that returns from stocks depend on earnings. Those companies that are able to pass on the higher input costs to their customers and still manage to grow their volumes will show superior earning growth and will remain in demand. This year, the Indian IT sector has witnessed $30 billion of incremental revenues and an overall growth rate of 15.5 percent, the fastest growth rate since 2011. The industry has also set an ambitious target to touch $350 billion revenue by FY26 which implies a double-digit annual growth rate. Acceleration of digital transformation, adoption of the cloud solution, powering AI capabilities, intelligent edge services, robotic automation, blockchain, could provide strong revenue visibility into diverse areas across BFSI, Engineering, Telecom and Automotive verticals.
Attrition in the Indian IT sector is at an all-time high. The supply-side constraints are forcing companies to offer above-trend salary hikes to retain talent. For example, TCS saw an attrition rate of 15.3 percent, while Infosys and Wipro’s numbers stood at 25.5 percent and 22.7 percent, respectively for the quarter ending December 2021. Higher employee costs are impacting the margins and we may see the same trend accentuating when companies announce their quarterly numbers in the next few weeks. Overall, we have a positive stance on the IT sector over the long run and investors should use any dip in stock prices in the next few months to accumulate large cap quality IT services stocks.
Apart from the information technology sector discussed above, we feel financial stocks are set for outperformance. The asset quality outlook is promising as the majority of the NPAs from the previous corporate cycle have been recognised and moved to the resolution phase. We expect lower slippages and higher resolutions and recoveries in the coming quarters. Economy has opened up gradually, which is evident from the strong growth in economic headline numbers. All these are presenting an improved scenario for credit growth. In the budget for FY23, the capital expenditure target for FY23 has been upped by 35.4 per cent at Rs 7.5 lakh crore. This hike in capital expenditure will boost economic growth and will create more jobs.
These would have a rub-off impact on private investment and demand. The new CAPEX cycle will drive much-need credit growth in the banking and financial sector. We are sanguine on the prospects of the financial sector and consider the current correction as an opportunity to accumulate stocks for long term investors.
