In an interview with ETMarkets, Hozdar said: “After a brutal 2022 when margins were squeezed, most companies‘ margin in this sector are now mean reverting” Edited excerpts:
Sectoral indices are hitting fresh record highs which suggests that Nifty and Sensex could soon follow suit. What is fueling the rally and way ahead? A fresh peak for the Nifty50 soon?
From the lows of March’23, the Nifty index has staged a smart pullback of 10% over the past 2 months. The Nifty Auto, Nifty Bank, and Nifty FMCG sectoral indices are at lifetime highs.
On the other hand, the Nifty IT, Nifty Pharma, Nifty Realty and Nifty Metal indices are currently in consolidation/correction mode. Markets are currently just ~1% below the all-time high level attained in November’22.
The ground situation across various sectors is seeing steady improvement given the fact that input costs have started mean reverting and thus margins are now firming up which eventually leads to better bottom-line growth.
The Q4FY23 result season is now drawing to a close and the overall results have not had any material positive/negative impact on the market.
Considering that the market is now fairly valued at current levels, the further upside here on would materialise once we see volume growth pick up across key sectors like consumption, metals, and auto.
What is your take on FMCG stocks? Recently, price action has increased in his space? What is leading the rally?
The Nifty FMCG index is at its peak currently. Many stocks including ITC, Varun Beverages, Britannia, and Nestle are gliding higher especially given that they have delivered good numbers in the quarter gone by and have given a healthy outlook.
After a brutal 2022 when margins were squeezed, most companies’ margins in this sector are now mean reverting. The staples space seems to be leading the overall consumption recovery while the discretionary space should follow later.
With stability in the supply chain the unorganized sector too will reclaim some share lost in the last year due to inflation given their price advantage.
This year the monsoon may not be as bountiful as it has been in the past few years. This is an important parameter for staples companies given that a large part of the population is based in rural India.
Commentary from the RBI suggests that India is on track for robust growth and further rate action will be data dependent which is comforting the bulls. But what can ruin bull party on D-St? Anything which investors should watch out for?
The actions of the RBI are always determined by the incoming data points; with inflation being one of the key focal points.
Both wholesale and consumer level inflation have unequivocally turned south which is very comforting for the central bank. Other high-frequency data points like e-way bills, PMI, electricity, auto, and steel demand are all growing at a healthy pace.
The sore points that investors need to have an eye on are the overall demand level in urban/rural areas and the level of employment. Consumption companies have expressed concerns on-demand pickup for some time now.
Improvement in the employment level is of paramount importance. Thus, if we do not see job creation pick up steam, demand conditions could remain sedate, which could lead the market to continue its consolidation of the past 19 months.
If the monsoon plays truant, we could see some impact on rural economy and food inflation.
We have gone through time correction, but we (India) are no longer cheap. FIIs have started to pour money into the markets. Is it macro stability or earnings growth which is fueling optimism?
The market has been in consolidation for the past 6 quarters. Earnings growth in FY23 is likely to see a 10-11% growth over FY22 Nifty earnings.
Thus, although we have gone through a decent time correction, we have not seen any major valuation rerating on the downside. FPI flows have surged in the first 2 months of this fiscal (Net Investments of ~45k cr).
The macros have seen steady improvement in CY’23td over the CY22 ground situation. Crude has come within our comfort zone; foreign reserves have started moving up and most importantly inflation has been tamed.
Macro stability is the first step towards having a more optimistic view on the ensuing micro performance of large sectors of corporate India.
We believe India offers decent GDP growth prospects coupled with macro stability, which is enticing foreign fund flows back to our shores post the pullback seen in CY’22
What about recession or economic slowdown in developed countries say USA or other parts of the world? How will that impact sectors here in India?
As per IMF, global growth is forecast to slow from 6% in 2021 to ~2.8% in 2023. This would likely place the current year’s global growth as amongst the weakest in the past decade (except for CY’20).
The US growth which is projected at 1.6% in CY23 is likely to decelerate further to 1.1% in CY24. The Eurozone is likely to fare worse with CY’23 growth likely at just 0.8%. Thus, the global macro picture does seem weak.
India being a domestic growth economy is likely to see lower stress due to global slowdown vs. other export-oriented countries.
That said, some sectors like Information Technology, auto/auto ancillary, and engineering export companies could see slower growth/de-growth.
The withdrawal of Rs 2000 note – is there any deep impact you foresee on the economy?
The withdrawal of Rs.2000 legal tender should most likely pass smoothly and in all likelihood could be a non-event. The said exercise could marginally help mobilise CASA for banks and ease the credit deposit ratio.
It may also prompt some (especially undisclosed income) to spend the notes on high-value consumer durables and jewellery.
Considering the fact that the said denomination will continue to have legal sanctity there is unlikely to be any rush to deposit the same in banks.
Whether they will continue as legal currency beyond September 30 is something the RBI is non-committal on considering that the RBI governor has said that the final decision on the same will be taken as we approach September 30.
Which sectors are you overweight and underweight on and why?
We continue to keep faith in the banking, consumption, auto, and hospitality sectors. The auto and hospitality sectors have just reached their pre-Covid operating metrics/volumes, thus the growth prospects could continue for some time.
The banking sector is benefiting from double-digit credit growth and a normalised NPA cycle. The staples consumption piece is seeing a slow revival with most FMCG companies commenting that the demand environment could see a gradual pick up coupled with margin expansion.
We would be wary of the metals, IT, and export-dependent sectors given their linkages to the weak global economic setup.
How do you pick stocks for your portfolio? What are the filters you use?
We prefer investing in businesses that not only exhibit strong earnings momentum but also consistency in growth over a business cycle.
We avoid cyclical/tactical bets and businesses undergoing substantial transitions/disruptions. Portfolio companies should exhibit consistent revenue growth and profitability, generate strong cash flows; have sustainable gearing; timely adapt to emerging technology/market trends, thirst for growth, and most importantly have clearly enhanced shareholder value over the longer term.
As it is rightly said: “the tried and the true triumph over the bold and the new”. Although such steady businesses trade at a premium we are comfortable investing in these businesses because this premium normally tends to be sticky and persists as long as the business has superior metrics vis-a-vis competition.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)