8-10 days ago it appeared that nothing could go wrong in the market; inflation had peaked out, FIIs were back, mutual funds were buying, earnings were looking great. Now, two days of a little bit of selling and everybody is saying we should not forget inflation. FIIs are back but they could go back again and RBI is saying that inflation has not peaked out.
The move that we have seen in the last month-and-a-half has been on the back of three key factors.
First of all, FIIs flows have come back in some manner. Also, with commodity prices declining, expectations are that margins will likely bottom up in the second quarter. India looks better placed from a growth perspective in a relative context.
Now we have seen this sharp up move in the near term. Given that there are still questions about growth and inflation, one could see some consolidation or volatility. However, if you just take a step back and look slightly ahead, maybe into the second half of the year with a slightly longer term or a medium term view, India does appear to be better placed in a relative context.
We cannot deny that commodity costs have corrected and that is a positive from an earnings perspective. Secondly, globally, while the growth inflation tug of war continues, India stands out as an outlier on the growth front.
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In India, we believe the focus is shifting slowly but surely from inflation to the trajectory of growth and in the second half of FY23, if the commodity cost movement continues and if nothing really goes wrong, a lot of uncertainties where India is concerned are possibly going to be behind us.
Having said that, we cannot ignore that valuations have moved up both absolute as well as relative to the emerging market pack. It is possible that in the near term, we will see some degree of consolidation or volatility and what we have been saying all through is that this is a year of bottom-up stock picking and that continues to be our stance with a slight tilt towards largecap over midcaps and smallcaps at this point.
A lot is happening when it comes to the IT sector and now we have the latest headlines talking about how variable pay has been delayed by some of these companies. Should this be taken as a precursor to some sort of slowdown in demand? Peaking of attrition might also get delayed a tad bit. How are you looking at the entire IT pack?
We have been cautious on the IT pack for a while now. If you look at the numbers of the quarter gone by – there are question marks in terms of the growth trajectory going forward and secondly, margin pressure has been slightly more than what was anticipated and which has led to earnings cut across the sector for most of the companies largecap as well as midcaps.
Now depending upon the wage hike cycle and certain news reports on delaying wage hikes, margin trajectory could vary between companies. The bigger question that we need to ask where the sector is concerned is the revenue growth trajectory.
Typically what we have seen for IT companies is that a lot depends upon how the growth outlook pans out in terms of the sector and that has a big correlation in terms of stock price movement. Globally with the US and Europe seeing a slowdown in terms of growth and uncertainty, especially in certain verticals which are already coming to the fore, growth is a bigger issue to address as far as IT is concerned.
Of course, the sector has seen quite a bit of correction in the last couple of months and therefore valuations are a little bit more reasonable than they were earlier.
At this point in time, given the current valuations, we believe that largecaps are possibly better placed to handle any kind of growth related pressures than midcaps where client concentration typically is large and hence the risk remains larger.
So overall our view on IT remains somewhat cautious. We will be watching out closely in terms of commentary especially from some of the larger banks, given that BFSI is a large vertical but our preference within the IT space is for largecaps over midcaps.