Q . What is your assessment of the economy and the corporate sector in FY23?
Answer : The Indian economy has seen a V-shaped recovery in FY22 after a steep decline witnessed in FY21. The swift recovery has been driven by pent-up demand, fast-paced vaccination, low base effect, a favorable external environment and supportive fiscal and monetary policies implemented by the government and the Reserve Bank of India (RBI). The strength of economic recovery is also visible in the strong pick-up in demand for power, movement of goods through rail and road, increased exports and rise in GST collections.
The corporate sector is in a much better shape than what it was pre-COVID. After a quiet earnings period pre COVID, we have seen a broad recovery in earnings growth. The corporate profit to GDP which was 1.6% in 2020 is expected to improve to 4.5% in 2023. We have also seen most of the corporates reduce their debt over the past few years with debt to equity ratio falling from 0.99 in 2017 to 0.71 in 2022.
Q . Which are the sectors and companies that are most likely to be impacted by the rising commodity prices and interest rates?
Answer : Rising commodity prices, in general, will lead to higher input cost and are negative for companies who are not in a position to pass on the cost to consumers. Higher inflation and high interest rates are more likely to affect the consumption-dependent sector. Higher interest rates in US can also lead to more FII outflows and this can pose a challenge in the short term, however, whenever FIIs selling tapers off or flows turn positive, it would be good for the market. But it is hard to say when that would happen.
Rising interest rates are good for margins of banks, at least for those banks that are liability rich, and all the index heavy weight banks have good liability franchises.
Q . How are you playing various themes across the portfolio & which are the areas where you’re extra cautious while picking the businesses?
Answer : In the current environment, we believe banks are well poised for growth given their strong balance sheets and low NPAs. The environment is extremely conducive for a revival in capex given that corporate leverage is at a 10 to 15-year low and profits are recovering quite strongly. We are also positive on manufacturing businesses given the large domestic market and improving ease of doing business, availability of skilled human resources at competitive costs and a strong focus on self-reliance in defence, chemicals, pharmaceuticals, etc. We are cautious on consumer led businesses where we feel the current growth rates do not justify the existing valuations.
Q . This is perhaps the third quarter in a row, when, in general, earnings estimates may be trimmed. What are your thoughts on the earnings downgrade cycle?
Answer : We have seen a broad based earnings growth over the last couple of years. However, of late, various headwinds like supply chain issues, high commodity prices, high interest rates, etc. may have some impact on the margins of companies in various sectors over the short term. However, we feel that India’s growth opportunity over the medium to long term is well diversified with growth likely across consumption, manufacturing, infrastructure and services. Investors should stay diversified via good quality and attractively valued companies that have the ability to traverse business / economic cycles while avoiding companies where performance is due to only short term unsustainable factors.
Q . What will be the impact on the Indian markets, if there are disruptions in the global supply chains, especially for oil and gas?
Answer : The impact of global developments on India’s economy is quite limited despite the fact that India has opened up quite a bit. Given the demographics, the consumption-led economy, other than oil, we are reasonably self-sufficient, and our pool of savings roughly matches our investments. Our exports to GDP and imports to GDP are quite small. So the variability of India’s economy to developments outside India is quite limited.
Views expressed herein as on (date) 20th May 2022, involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. The data/statistics are given to explain general market trends in the securities market, and has been prepared on the basis of information which is already available in publicly accessible media. Stocks/Sectors referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security covered under the respective sector/s. The Fund may or may not have any present or future positions in these sectors. Past performance may or may not be sustained in future. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.
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