By Nikhil Kamath
With index multiples running close to 20x times (on a trailing basis) and avenues for triggering earnings upside remaining limited, the broader markets are expected to continue moving sideways. In some sectors, downside risks have materially inched up. For example, commentary from consumption-oriented businesses suggests that rural demand continues to remain weak. Of late, unseasonal rains have led to crop losses worsening rural cashflows. With high-cost inventory expected to take a few more quarters before it is fully liquidated, recovery in demand and margins is far away. In some other sectors, such as IT services, management commentary has deteriorated versus the previous quarter.
Although employee attrition rates have started easing, it is too early to say if this is because of their clients revisiting their commitments. Therefore, large private sector banks and PV-oriented Auto-OEMs (Original Equipment Manufacturers) are looking like the only bright spots in our universe. Bank credit growth is at a multi-year high (it has seen the best start to October in at least the last ten years), with almost all segments showing strong traction. With rate transmission not yet fully priced, we can expect NIM improvement to layer up the robust loan book growth to aid banks in delivering healthy operating performance. Since most lenders have upfronted extraordinary provisions (Covid-related) in the last two years, the incremental coverage requirements are soft.
This will lead to above-average return ratios and drive re-rating in many banking stocks. Post-recovering from the effects of the COVID-19 pandemic, the passenger vehicle industry is expected to record growth rates of around 25% on-year for FY2023. New launches, improvement in semiconductor availability, and the (primarily) urban profile of the customer are the key drivers of this book. Further, with the mix moving more towards higher ticket-sized types (i.e. SUVs), the value growth is also expected to be quite strong. However, I remain cautious about the two-wheeler segment – the demand in the lower ticket size segments continues to exhibit weakness.
(Nikhil Kamath is the co-founder of Zerodha and True Beacon. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)