Spread the love

“With regards to industrials, our view on India in the medium term has been fairly robust. We think there is a good chance that we will see a capex cycle still come through over the next two to three years,” says Trideep Bhattacharya, CIO, MF.

The scare of a global slowdown as a second order effect of high inflation seems to be haunting the market globally and India is also under pressure. Can this slowdown affect India as well and in that case, will we have to shrink the valuation of the market further to adjust?
I would say that the fear is for real. We have been talking about a volatile first six to nine months of the year and we are gradually coming to the point where according to initial expectations, this month or maybe in the next couple of months, inflation would peak and after that, courtesy the base effect, it should start coming down.

But before it starts coming down, there is a peaking element which is basically what we are in the process of right now. Hence incremental data points oriented towards higher inflation are spooking the markets and understandably so. My sense is that it is going to remain this way for the next couple of months till the worst of inflation is over. After that, it should start coming off if the flow of things goes around

What does it mean from an Indian corporate standpoint? Oil is the main thing to keep an eye on apart from various other commodities. Rather than getting into this monthly discussion, if oil stays at $120 plus come Diwali, then there is a reasonable chance of demand destruction on the other side and we will have to prepare for some tough times, recessionary times or stagflationary times whichever way you call it over the medium term.

But barring that, my current expectation is still that in the next couple of months, inflation should peak. It will give a couple of nightmares like it is showing in the market today but it should broadly peak in the next couple of months and gradually come down not to the levels that we have been seeing in the last one year but certainly higher than that but lower from where we are; that is the current expectations. But we are keeping an eye on it and acting accordingly.

« Back to recommendation stories

How are corporates coping? Any feedback?
I would put in a bit of context. In India, the inflation that the Indian corporates are facing in the domestic arena is similar to what they have faced probably in 2015-16. So there has been time in the last decade or so where they faced a similar kind of inflation levels overall from a CPI standpoint. WPI is obviously higher.
But in the United States, the inflation that they are facing is similar to what they faced in 1970s. So that is clearly top of the charts as compared to what we are facing in India. Net net, the inflation situation in the United States is probably graver than what we are facing in India. But having said that, when I speak to corporates, they are saying that even larger companies like and the other staples companies have had to take price increases in double digits and that has to a certain extent, had an impact on the staples volume growth in the near term. But what they are also saying is that there are incipient signs of rural recovery which is coming through and which is why they are not outright bearish. They are sort of cautious on the volume growth over the next couple of quarters.

But beyond that, they are hoping that some sort of better monsoon and rural recovery would effectively bail the rural consumer out or at least that section of the population which has got significantly impacted by the inflation will get some respite on the back of some rural recovery.

But barring that, generally in the near term, corporates are setting their expectations for the June quarter. They are setting the expectation of fairly tepid volume growth but on the other side, they are still hopeful that the rural recovery would come back to help them.

Copper prices are at a seven-month low. Other metal prices are also down 15-20% from the recent top. Would you be constructively looking at commodity user companies from the auto space, from capital goods and some other areas?
I think increasingly yes is the way to answer your question. There is still one quarter of pain remaining with a bit of backward bias. In other words, the commodity price increases that have already come through will impact the margins in the June quarter and that will probably be the worst impact in terms of commodity price impact on the margins because pricing power or pricing reflection usually happens in a couple of quarters. When the commodity price impact is fairly high as in the March and the June quarter, these will probably face the brunt of the commodity price impact.

So one more quarter of pain is remaining and increasingly that is the way to look at it but not in a jiffy, particularly with regards to the commodity user company. With regards to industrials, our view on India in the medium term has been fairly robust. We think there is a good chance that we will see a capex cycle still come through over the next two to three years and hence we are positive on industrials. But incrementally from a commodity user standpoint, we are starting work on them, hopefully in the next three-four months we will get better prices which can be interesting entry points.

After correction, what is the one-year forward kind of a multiple for your key portfolios? How much lower have they come down in the last few months?
Overall this something which we covered in the last interview as well where we said that by and large there has been a change in interest rate regime just to set the context right and in the sense that earlier we were dealing with falling interest rate for the last 10 years and over the last six-nine months we are dealing with increasing interest rates and typically when that happens valuation contraction happens.

If I were to look at the market in general, it has seen a valuation contraction of anywhere between 20% and 25% over the last three to six months. We have been fortunate and hopefully with the bit of skill, we have avoided the high valuation companies in our portfolio. So while some of our portfolio holdings have taken a knock, it is a limited few versus the kind of valuation adjustment that we have seen in the new-age tech companies. Since we by and large avoided that, the impact of this valuation compression on the portfolios has been relatively limited. But across the market, we have seen 20-25% valuation compression, probably a little higher for the higher valued stocks. I think that is driven by the interest rate regime change that we have seen globally as well as in India.

Can I assume a similar kind of valuation contraction would have happened in your portfolios as well or it is relatively lesser, so if you could say if you are mixed portfolio, multicap has come down to 15 times forward or 11 times can you give me that kind of view?
The market one year forward is still at around 19-20 times, our portfolio is certainly lesser than that. It is 15 to 17 times, depending on which portfolio holdings you are looking at but what we have to look at is that compared to broader market growth, the earnings growth of our portfolio is also 5 or 6 percentage point higher. So relative to the market, the portfolio brings forward a better growth profile and lower valuations as compared to what we were dealing with a few months ago.

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


Leave a Reply

Your email address will not be published. Required fields are marked *