Expect banks, autos, cement stocks to do well in FY24, IT to lag: Naveen Kulkarni of Axis Securities

'There was consistent outflow of foreign institutional money from India last year'

Naveen-Kulkarni Naveen Kulkarni

Equity markets had a volatile 2022-23 financial year and benchmark indices delivered fiat returns. Things this year could also be volatile, but, there are still a lot of opportunities to invest, feels Naveen Kulkarni, chief investment officer at Axis Securities. He expects sectors like automobiles, FMCG and banks to do well. Cement also could be an interesting pick. However, information technology companies are still some time away from regaining momentum, given the demand uncertainty, Kulkarni told THE WEEK in an interaction.

Last year, the market gave very lackluster returns. This year also we have seen volatility. What is your assessment on 2023-24?

In financial year 2023, the nifty benchmark was flattish, around 0.5 per cent and that is total returns. The broader market was even more negative; the Nifty 500 was down around 1.5 per cent. The biggest challenge for the market is what is the cost of equity.

The cost of equity went up last year. We actually started seeing this end of FY22 and that continued to be the case in FY23. So, rising cost of equity means you are going to see compression in valuation multiples. And tha is what has happened in the last one year.

There was consistent outflow of foreign institutional money from India last year. That has all to do with valuations and cost of debt and cost of equity; all those things are changing. Its a mathematical reset that has happened. Now, in FY24, we are still in that period of adjustment.

But, we will also be staring at a decline in interest rates, probably end of this year. Globally, if interest rates were to come down from these levels, then the chances of the cost of equity going down by end of next year will be higher. So, the chance of things getting re-rated has increased significantly now, provided the earnings growth trajectory sustains. Biggest questions for FY24 is how will the demand scenario be and what is going to be the earnings growth trajectory.

Are there still concerns over equity valuations?

Valuation, which was a challenge a year back, is no more a challenge, but growth is. If there are not many challenges to growth and growth continues to be good, markets will do very well for the year.

So, let us say that there is a case for 10-12 per cent earnings growth for FY24. But, there is also a chance of re-rating by 10 per cent. So, we could see a 20 per cent return for FY24. But, if growth rate were to come down to 5 per cent, then multiples will not improve and the market will deliver a 5 per cent return only.

If I am able to get my growth prospects right and I am able to invest sufficiently, there is a very good chance that we will make good money in equity.

But this investment will not be across the board and one will have to be selective in FY24?

Nothing ever happens across the board, it has to be very selective. If you see in FY23, what did well was banking stocks, especially the PSU stocks. We saw automobile sector doing well, industrials doing well and last but not the least, we saw FMCG sector doing well (dominated by ITC).

I don't see many challenges to FMCG sector in FY24 also. Auto sector should also do well in FY24. There could be challenges from monsoon, and two-wheeler growth, but overall there are other aspects like production numbers that are likely to go up, and chip supply shortages will be over by end of this year. So, there will be no challenges with regards to production; demand is okay. Then of course, banks will continue to do well. There will be some pressure on NIM (net interest margin), but credit growth may not be like what we saw last year, but will still do 13-14 per cent. Only challenge with banking sector is there are too many options available. Still, I would say that you buy anything where valuations are reasonable, you will make a 10-12 per cent return. If valuations are cheap, we might make 20 per cent.

Interesting sector for this year could be cement, because so much infrastructure push is happening and real estate is doing well. So, cement is a good sector to look at. We could also be looking at pharma as a sector because US generic market seems to be improving. Then, metals as a sector if China opening up theme continues traction, which might happen by the end of this year. That is another sector which can do well, especially iron and steel.

IT was correcting because of an impending US recession. It might be some time before a sector like IT rebounds.

Would you start accumulating IT stocks at this point or wait for more clarity to emerge?

The problem with IT sector is I am not very comfortable with the valuations. IT sector went to almost two and a half three standard deviations above the normal in terms of valuations. Right now, its still one standard deviation above the mean. Midcap IT stocks are still very expensive. There are only pockets in largecap IT, which are cheap. Moreover, we might see an adjustment happening in total discretionary spending for a lot of companies in the US. We could see pains in BFSI (banking, financial services and insurance). So, I don't have clarity on what will happen in that space, neither do the companies have. This is the year where there could be downgrades for IT sector. So, the way I will play the IT sector is when I reach the peak of downgrades.

Within autos are you focusing on certain categories?

We continue to like the passenger vehicle segment. What is happening in automobile sector is lot of products are getting launched. There are multiple levers playing out. There is an electric vehicle story. There is a SUV theme. There is premiumisation happening here; more safety, more sporty cars, better quality, realisations are going to go up. So there are intrinsic tailwinds in the sector, which are helpful. One should not be too worried about what will be happen in monsoon.

So, on a broader market level, there could be 10-12 per cent returns, but there could be volatility?

It has to be volatile as there is no clarity around the macro data. If good news is going to result in further rate hikes, then good news becomes bad news. If bad news leads to rate cuts, it becomes a good news. It is a very complex story on that front. Rate hikes have happened at a fairly fast pace. We have seen that even the banks have had a challenge, especially in the global markets, to adjust to the curve of rate hikes. Credit Suisse, for instance, which was a very credible name, got merged. Banks like SVB (Silicon Valley Bank) are also not very small. They got bankrupt. So, the financial system has had a challenge to adjust to the higher rates and that will have an impact on the real economy also at some point in time. It's a matter of wait and watch.

But, interest rates are very close to topping out. We have seen a RBI pause in rate hikes. There is a challenge on the growth rate. But my view is that corporate earnings will still grow. 

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