ETMarkets Smart Take: Impact of commodity prices may not fully reflect in Q4FY22 but in Q1FY23, says Parag Thakkar of ICICI Pru AMC

Thakkar has an overall work experience of more than 14 years, having worked with Quant Capital, Brics Securities and Refco Sify Securities (Now Philips Capital).

In an interview with ETMarkets’ Kshitij Anand, Thakkar said that one round of FII selling is already over, but it remains to be seen how aggressively the US Fed will go about withdrawing liquidity as they start shrinking the $9 trillion balance sheet. Edited excerpts:

Indian market has been volatile amid the Russia-Ukraine war which is not showing any signs of easing out. Commodity prices have already shot up in the last 2 months – how will it play out for Indian markets?

India is very well placed in terms of macros, even if crude oil settles at around $100. However, if crude hovers above $120, then there could be stagflation worries which could lead to demand destruction plus the current account deficit situation would also worsen.

Currently, it appears that crude has settled between $100 and $120 and in the near-term equity markets seem to have factored in this development. This is one aspect that will be closely watched till this conflict is resolved.

Any word of advice on how investors should shortlist stocks for investment?

Given the rising commodity prices, US interest rates, and Fed shrinking balance sheets at a time when market valuation is no longer cheap, times are not easy.

In such a situation, it is imperative to stick to the basics like keeping some cash in the portfolio, being invested in non-leverage, cash flow generating liquid stocks which provide good dividend yield.

FIIs have been net sellers in Indian markets for the past 6-7 months. With rise in inflation, US might go for another round of rate hikes. What is the kind of money flow you see towards India?
We believe that one round of FII selling is already over. It remains to be seen how aggressively the US Fed will go about withdrawing liquidity as they start shrinking the $9 trillion balance sheet.

On a bottom-up basis, there could be some margin pressures due to input costs going up and companies are likely to hike prices in a staggered manner. So, some impact on earnings is expected.

Given that the market valuation is no longer cheap, I would say that the number of bargains available in the market is less.

Many rating agencies have downgraded the GDP forecast for India. How will that play out for our markets in FY23?
The rise in commodity prices coupled with inflation will hurt consumption. On the other hand, rising crude oil prices will restrict the government’s spending on infrastructure.

However, the silver lining here is that tax collection — be it GST or income tax, is very strong. Given that the intent of the government to spend on infra and CAPEX remains unless crude remains higher for the full year, we do not see any significant risk to the macro, and government spending. So, we do not see a case for GDP being revised downward significantly.

How do you sum up the last financial year and expectations of FY23 – for markets, economy and earnings?
Last financial year was full of activity. On one hand, we had positive news from GST, and income tax collections while on the other hand, there was a sharp rise in commodity prices which is a negative for India as we are major importers of commodities.

But up till now, the government has managed the situation very well by gradually hiking fuel prices so that the economy does not face any shocks.

If the current geopolitical conflict is resolved or if India manages to buy meaningful quantities of crude from Russia at a low price, then there is not much of a concern for India.

In terms of earnings, the impact of commodity prices may not be fully reflected in Q4FY22 numbers but the same will be visible in Q1FY23. So, going forward, we could see significant price hikes in cement, two-wheelers, cars, etc.

It remains to be seen how consumers respond. In case of a negative reaction, consumption stands to be impacted which is why FMCG, cement, and two-wheeler stocks saw significant correction and if the price hike is absorbed by the customer and still demand continues, then there will be a positive surprise.

Which sectors are likely to be in focus in the next financial year and why?
We are positive on banking as credit growth is likely to pick up and asset quality is also improving, given the worst of corporate NPAs has already occurred.

Also, in the FII selloff, this was one sector that saw significant paring of exposure pushing it to the oversold territory. In case if the earnings turn out to be encouraging, there is a case for a positive surprise.

Consumer durables are likely to perform well given the heatwave in several parts of the country. In case if the monsoon is good, demand uptick in tractors and two-wheelers is likely.

So, this year, we could be poised for a sector rotation. At the same time, corporates may undertake various measures to withstand margin pressure in the quarters ahead.

So even if there is some element of earnings disappointment in certain counters which faced significant correction, we could see a recovery in stock prices.

In effect, we might see a sector rotation in favour of domestic cyclical, which have underperformed recently such as two-wheelers, cement, FMCG, and banking in the quarters ahead.

How do you see primary markets in FY23?

At ICICI Prudential, we did not participate in most of the IPOs last year. When it comes to making an investment decision, our focus is on sustainable cash flows and potential growth in cash flows.

Most of the IPOs last year fell short of these parameters even though they may be potential long-term growth stories. We believe the IPO mania atleast for the time being has cooled off given the recent not-so-good investment experience.

Any big triggers that investors should watch out for in FY23?

In the short term, the Russia-Ukraine conflict is a major trigger. But on a medium-term basis, developments from the US Fed, crude oil price trajectory, and corporate earnings growth will hold sway over the market.

If the US Fed aggressively pursues withdrawing liquidity and increasing interest rates, an era of easy money will be over. Hence, we believe it will be a stock pickers market.

So, investors should opt for companies with the least debt, strong, sustainable cash flows, and which are available at reasonable valuations. Buying a company at any PE does not work when interest rates are rising and liquidity is set to tighten.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)