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Short term disruptions in market likely, risk-reward balanced; quality stocks present money making opportunity

The elevated metal prices, rising crude oil prices, and increasing freight costs will all mean that there can be a 5-6% earnings cut for FY23F. This could lead to some short term disruptions in the market

nifty, stock markets, investment
While the situation geopolitically remains grim, India’s fortunes shall be dented only minutely and have been more than factored in by the markets

By Manish Jain

2022 has been quite an eventful year so far, from the quite unexpected Russia-Ukraine conflict to the reemergence of the Covid-19 wave, markets have remained fairly volatile. However, having said that, things seem to be settling down now as the Nifty has rallied a little more than 2,000 points (or ~14%) in the last one month. The key question that all investors are asking merits a serious thought: Is the worst behind us and should we be investing now?

We do believe that economically, the Russia-Ukraine conflict will have a limited impact and India shall remain one of the fastest-growing economies in the world. We should still be able to clock low double-digit GDP growth in nominal terms and high single-digit growth in real terms. Even though the inflation situation is not as bad as it is in some of the more developed parts of the world, the real interest rates are a little higher than -200bps. The government finances remain robust and the mop-up is higher than the revised estimates also. We do believe that this is positive and will likely lead to an increased focus on capital expenditure which shall remain one of the key pillars of growth. So, while the situation geopolitically remains grim, we do believe India’s fortunes shall be dented only minutely and have been more than factored in by the markets.

The second bigger concern is the re-emergence of the Covid crisis. Europe, New Zealand etc. have all witnessed a resurgence in infection. Even some of the more isolated countries like China are undergoing the worst phase right now. This essentially means that in the coming couple of months, a fourth wave is likely to emerge in India too. In the hurry to open the economy up, we seem to have completely forgotten the inevitable. While this does remain a possible overhang, we do believe that the government has learnt the art of managing the human and economic impact quite well. With each wave, the fatality rate, hospitalization rate and even the economic impact has been coming down. Hence, as long as it is not too threatening, we believe that the market will take it in its stride.

The third and final concern is the earnings cut which will happen as Q4FY22 and Q1FY23 unfold. The elevated metal prices, rising crude oil prices, and increasing freight costs will all mean that there can be a 5-6% earnings cut for FY23F. We believe that this could lead to some short term disruptions in the market. However, despite that, the risk-reward is quite favorably balanced. For a sustainable 11-12% earnings growth we are paying just about 18-20x multiple pegging the PEG multiple at less than 2x. We believe markets have now factored in the fact that margins are likely to remain under pressure in the next couple of quarters.

Hence, the conclusion is that from a 2-3 year perspective, most of the bad news seems to have been factored in. Selectively, quality stocks do present a great money making opportunity. Choose the stocks as wisely as we choose for our Coffee Can portfolio.

Happy Investing!

(The author Manish Jain is a Fund Manager at Ambit Asset Management. Views expressed are his own.)

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