Varun Lohchab of HDFC Securities
“We expect the budget to focus more on the country’s supply side infrastructure. We don't believe that there has been a drastic demand reduction in India due to the interest rate hike cycle, as the underlying macroeconomic numbers remain resilient," Varun Lohchab of HDFC Securities told Moneycontrol in an interview.
The Nifty IT index witnessed multiple erosions in CY22 and its valuation now stands one standard deviation above the historical average, which indicates that it is still not very inexpensive, the Head of Institutional Research feels.
Lohchab, who has 18 years of experience in Indian equity markets across leading buy-side and sell-side firms, including Fidelity, Franklin Templeton and Jefferies, is of the view that while the IT index may not witness a deep correction, its upside is limited as well.
Edited excerpts follow:
If there is no change in the tax regime in Budget 2023, do you think it will be great news for the market as well as the international investor community?
If there is any reduction in personal income tax rates, it will undoubtedly be a positive as higher disposable income will lead to higher consumption. However, we do not expect that to materialise in the upcoming budget. Tax collections have been stronger than expected in FY23, which is supporting the government's drive for higher fixed capital investment.
Similarly, we do not expect any changes to the corporate tax regime as wholesale changes were made just four years ago. Lastly, we expect the markets to respond favourably if the status quo is upheld for LTCG (long term capital gains).
What could be the main focus areas in Budget 2023? Also, is it going to be a populist or growth budget, considering the general elections in 2024 and several state elections in the current calendar year?
Whilst there are expectations that the upcoming budget will be too populist, we don't believe this will be the case. As in the past, we feel it will be a balanced budget. Our reckoning is that the FY24 budget will somewhat mirror the previous year's focus on public and private sector capex.
As reiterated before, we believe the government should increase capex by 20-25 percent with increased sectoral allocation.
Furthermore, we expect to see the launch of 7-8 new PLI (production-linked incentive) schemes, coupled with tweaks to some prior schemes, to continue support for private sector investment further. Considering that this is the last budget before the next general elections, we are also factoring in higher allocation to food subsidies, employment guarantees and rural infrastructure.
Do you expect the Finance Minister to take steps to boost consumption, which has been impacted by rising interest rates?
As mentioned earlier, we expect the budget to focus more on the country’s supply-side infrastructure. We don’t believe that there has been a drastic demand reduction in India due to the interest rate hike cycle, as the underlying macroeconomic numbers remain resilient.
Any measures to spur consumption are likely to be focused on rural India, where household earnings have been relatively weak.
The Nifty IT index surged around 8 percent over the last one-and-half months. Do you think the sector has bottomed out now or do you expect one more big correction?
There have been appreciable improvements in key operating metrics viz. attrition, subcontracting and employee expenses offering timely support to sector profitability. But, at the same time, the demand environment is moderating, providing only limited visibility about FY24 business growth so far. This combination of easing supply side crunch with demand moderation caps any significant upside potential for the sector.
The Nifty IT index witnessed multiple erosions in CY22 and its valuation now stands one standard deviation above the historical average, which indicates that it is still not very inexpensive. Hence, overall, our view is that while the IT index may not witness a deep correction, the upside is limited as well. Hence, it would be prudent to wait for the FY24 demand scenario to become clearer and then take a decisive call.
What do you make of the corporate earnings announced so far? Have you spotted any new trends or themes?
So far, earnings have been resilient in spite of the uncertain macro environment and global inflationary situation. We believe there is no risk to index-level earnings as the heavyweight sector banking has delivered robust results. Further, this has been accompanied by a decent performance by auto, large IT and FMCG companies. So, while there are sector- and company-level divergences, at an aggregate index level, earnings are expected to be broadly as per estimates.
There is another key trend worth noticing; commodity inflation has eased in several sectors and hence most of the commodity consumer companies have indicated early signs of profitability revival. Having mentioned this, it should be noted that the real benefits of softening commodity prices will be observed only in Q4FY23.
Do you think the cement sector should be in a portfolio?
Given the buoyant real estate sector, led by increased affordability and the government’s clear focus on capex-led growth in the country, we believe the cement sector is a direct beneficiary. The sector is reasonably consolidated and the top four players are investing in new capacities, anticipating rising demand in the medium term. So, we have drivers in place for an optimistic cement demand trend.
However, what ails the sector is volatile fuel prices. In the last few quarters, high fuel prices have hit the profitability of cement companies, although calibrated price actions have alleviated the impact. As per management commentaries, the fuel price pressure on profit margins is expected to reduce gradually hereon, while medium-term demand optimism remains intact. Hence, we are of the view that the cement sector should be part of long-term portfolios.
Do you see any kind of worry for banks in the coming quarters?
As per a recent RBI report, system credit grew 17.5 percent YoY while deposit mobilisation growth was much lower at 9.9 percent YoY. There is an evident scarcity of deposits to fund the upbeat credit demand. This has led to an obvious competition between banks to garner an adequate amount of deposits, without losing much on deposit rates.
With a lag after RBI hiking policy rates, banks have started passing on increased rates to depositors in a calibrated manner. This is expected to bring the NIM (net interest margin) of banks, which has been hovering around record high levels, under pressure.
At this juncture, high CASA-funded banks with granular retail deposits will outperform other banks reliant on wholesale deposits or high cost borrowings. Hence, we believe that although NIM will gradually move downward for all, there will be a clear distinction between the performance of banks depending upon their deposit raising capabilities and other banks.
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