"Expectations point to a sustained robustness in earnings growth, predominantly driven by the moderation in input prices and a favorable domestic demand environment," remarks George Thomas, Associate Fund Manager at Quantum AMC, in an interview with Moneycontrol.
With an experience of 6 years in equity research across multiple sectors, Thomas believes that though there could be some moderation in sectors reliant on exports, overall demand and consumption trends in the domestic economy remain favourable.
He also says the fund house is overweight on financials, consumer discretionary and IT. "IT exposure is through large IT service companies where valuations are attractive given their long-term prospects," he says.
Q: What is your reading on RBI monetary policy decision?
The MPC (Monetary Policy Committee), broadly in line with market expectations, kept the interest rates unchanged. The impact of a steep rate hike of 250 bps over the last year is still being absorbed by the system and headline inflation is coming off and projected to be lower in FY24. It's prudent to adopt a wait-and-watch approach.
From an equity markets point of view, it is quite clear that the rate hike cycle is over (unless there are major global dislocations) and current policy will not cause any hiccups to the growth trajectory that the country is on. Most of the domestic indicators are looking positive; credit growth despite coming off a high base should also remain resilient and the current policy stance will not derail that trajectory.
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Unlike the developed world, which is witnessing high interest rates after a long period of time, the Indian interest rate regime is getting normalised to pre-covid levels and hence will not dampen the growth or investment activity in the country.
Q: Sectors where you have an overweight rating?
We are overweight on Financials, Consumer Discretionary and IT. Under Financials, we have exposure to large banks, a couple of NBFCs and a few savings-related themes. Consumers Discretionary is majorly contributed by Auto, especially the two-wheeler pack.
IT exposure is through large IT service companies where valuations are attractive given their long-term prospects.
Q: What are the challenges for the banking sector in the rest of the financial year, though most of the experts have a bullish view of the space?
Net interest margins could moderate as deposits would be repriced at higher interest rates. Corporate credit demand could moderate and inflation-led working capital requirements could reduce in the current year.
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Though credit growth could moderate, favourable economic cycle and moderating inflation will likely support reasonable system growth in the medium term. Despite the recent rally, we believe valuations continue to be reasonable in the banking space.
Q: Do you expect a pause in interest rate hike cycle by the Federal Reserve in June policy meeting?
Fed will likely pause in the June meeting as they may decide to wait for more evidence that the economy is cooling. But, in case the labour market continues to gain strength and inflation fails to ebb, there is a remote possibility for one more rate hike in the coming months.
Q: Do you think the Reserve Bank of India is likely to retain its policy stance for a longer time?
We expect the RBI to remain on an extended pause in the foreseeable future to support the economic recovery. Liquidity has come down to near-normal levels and inflation is likely to be within the RBI’s tolerance limit.
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Q: What do you expect in terms of earnings growth for FY24, after reading FY23 numbers?
Earnings growth is likely to remain healthy. This is largely because of the moderation in input prices and a reasonable domestic demand environment. Though we could see some moderation in sectors reliant on exports, overall demand and consumption trends in the domestic economy remain favourable.
Q: Do you expect the sectors that underperformed in the last two years to perform better going ahead?
Economic momentum over the past two years was powered by the premium segment of the market. With inflation moderating, we expect the mass segment to start contributing to economic expansion. Sectors linked to mass consumption could benefit disproportionately in the medium term.
Q: Your take on pharma sector?
Post the high growth rate seen during the pandemic times, the base has normalized for the sector. US pricing pressure is showing signs of moderation while the domestic pharma market offers reasonable growth prospects and better cash flows.
Given this scenario, companies with a reasonable product pipeline and exposure to India would be the preferred plays.
Q: Your favourite segment for investment in the renewable space?
There are very few direct opportunities in pure-play renewable space. Of the ones available, valuations are ahead of fundamentals in most of these names.
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