ETMarkets Smart Talk- India saw a muted run vs Nasdaq or Japan despite hitting record highs: Kaizad Hozdar

In an interview with ETMarkets, Hozdar said: “When seen from this angle, we have actually had a lacklustre run vs. the other large peers” Edited excerpts:

Market at record highs. Do you see the momentum continuing in 2H2023 or we could see some consolidation?

We have seen a strong 14% uptick in our market from the March’23 lows. So, the question uppermost on the investors’ mind is: “so what lies ahead”.

The reality is that in CY23 till date our market has rallied just ~6% while the other major indices have delivered far superior returns [Nasdaq 31%, Japan 27%, Taiwan 20%, S. Korea 18%, Germany 16%, US 16%, France 14%].

When seen from this angle, we have actually had a lackluster run vs. the other large peers. Post a sedate 11% rise in Nifty profits in FY23, the prospects in the current financial year should certainly be brighter given the fact that the heightened headwinds of input cost and freight inflation pressures are now a thing of the past and have turned 180 degrees into tailwinds.

Thus, bottom-line growth in FY24 should be more robust than in FY23.

High-frequency data points like e-way bills, PMI, electricity, auto, and steel demand are all growing at a healthy pace. In addition, crude prices too are certainly to our liking along with strong GST numbers.

Macro stability is the first step towards having a more optimistic view of the ensuing micro performance of large sectors. Thus, we believe the current up move is an indicator of likely improving margins and the overall health of corporate India.

Which sectors are likely to hog the limelight in 2H2023?
Some of the cyclical industries like tyres, cement, auto, and hospitality have already seen margin improvements in the quarter gone by and given the continuing slide in input costs like metals, crude, pet coke, and freight, the profitability of corporate India could continue to get stronger. Thus, the bottom-line growth could certainly shine brighter than the top-line growth.

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 should one play the small & midcap theme in the second half of 2023?
In 1H CY23 the Nifty Midcap 50 index has clearly stolen the show with a return of ~16% vs. the Nifty 50 return of ~ 6%.

Sectors like Auto Ancillary, NBFC, Capital goods, Industrial Consumables space, Packaging, Freight/transportation, Hotels, Tyres, midcap Cement, Speciality chemicals, Hospital chains, Realty, Construction materials, and Travel/leisure have fared well in the past 2 quarters and that opens up a large number of stocks to pick from the midcap space.

Over the past 10 years, the Nifty Midcap100 has delivered 18% CAGR while the Nifty has delivered just 12.5% CAGR.

Hence, it is apparent that although the mid-cap space is a riskier hunting ground, this risk is being adequately compensated by higher returns. Hence, a long-term investor would do well to have an allocation to this space.

In fact, the US market is seeing good strength this year as there is talk of a mild recession there. If that is the case, markets may have further legs to build on from the current levels.

So this explains the favourable outlook toward the midcap space

FIIs are slowly coming back to D-St. Will the inflows continue even though some central banks are raising rates?
The market has been in consolidation for the past 7 quarters. Given the input cost pressures and multi-decade high inflation globally, Nifty 50 earnings growth in FY23 has been decent at ~11% over FY22 earnings.

Thus, although we have gone through a time correction, we have not seen any major valuation rerating on the downside due to healthy profit growth.

FPI net investments stand at ~Rs.76,000cr in 1HCY23. We believe India offers decent GDP growth prospects coupled with macro stability which is enticing foreign fund flows to our shores.

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