Stocks to buy: Be stock specific and look for opportunities in the broader market: Shibani Sircar Kurian

There has been a 10% move in the markets since the Budget announcements. Would you say at least for the near term, the best is captured in the price?
The Budget has reinforced that India’s growth is pretty much back on track and the growth revival in India is fastest vis-à-vis some of the other emerging economies. The Budget also brought to the fore the need to improve the infrastructure spend as well as investment-led GDP growth. The numbers that have been put out in the Budget are fairly credible and it is all up to the execution in terms of the infra spend leading to growth revival.

There are four key things to watch out for; one, growth normalisation on the economy front. Second, the corporate earnings trajectory, that started in Q2 and has continued into Q3 of this financial year as well. The numbers are much higher than estimates both in the top line as well as the bottom line and after a very long time, we are seeing earnings upgrades for both FY21 and FY22 and that is what is clearly supporting the markets. Therefore, the continuation of this earnings growth trajectory is going to be the key.

The third factor is that FII flows into the country continue to remain fairly strong. Finally, we come to valuations. When one looks at valuations on a price to earnings basis, we are trading at multiples that are higher than long-term average multiples. However, if we look at India’s valuations relative to the emerging market peers in terms of relative valuations, we are close to long-term average multiples and therefore the trigger for markets from here on will be the corporate earnings trajectory. If the earnings growth continues to surprise positively, we could continue to see earnings upgrades and that could be supportive of current valuations.

Where within the market do you believe that pockets are looking overvalued or where the best of the earnings growth is already in the price?
Let us look at it in two parts. One, in Q3 numbers, we saw a significant earnings surprise taking place in segments like industrials, light engineering,cement — domestic cyclicals by and large, including the banking sector has seen a large amount of earnings surprises. If this kind of momentum and growth continues to be well on track, earnings revisions could continue in some of these sectors. We are looking at companies where market share gains are very visible.

In this round, especially post Covid, the shift from the unorganised to the organised segment has picked up pace and therefore a number of companies in the listed space are benefiting. In terms of earnings, some of the large sectors like IT services have seen a very sharp run up over the last few months. Post Covid, IT was one of the sectors that was holding up and therefore today we are factoring in a very, very sharp revival in terms of revenue momentum on the back of deal flows.

However, in the sector per se, the margin trajectory and margins have been holding up because costs have been cut and utilisation levels have improved. Incrementally valuations especially where the midcap IT segment is concerned is factoring in this continued sharp revival in terms of revenue momentum and top line growth. Therefore, post the sharp runup in some of the midcap IT names, it would be better to be in some of the large cap IT stocks, Therefore look at earnings momentum going forward from here on. But overall from a market perspective, we do believe that the earnings momentum remains fairly strong.

Going into Q4, base will be on our side as well and therefore it is possible that for some time, the earnings revision story stays intact. However, given the valuations, we believe bottom-up stock picking is the way forward. One has to be very stock specific in nature and therefore we are looking at opportunities in the broader market.

What is the outlook on the likes of Tata Steel, JSPL? How have you read into their quarterly numbers?
Let me talk about metals as a sector. We have clearly seen that the numbers for the quarter have reflected the strong commodity price uptrend that we have seen. At the margin, there has been some softening of commodity prices.

Commodity stocks as a basket are cyclical in nature. A lot depends upon how global growth, especially growth in China, pans out. If the growth trajectory continues, we could see some stability in metal prices. We look at companies where there are clear signs of deleveraging and wherever we are seeing that, along with the commodity price cycle up move, we have those stocks in our portfolio, with preference for ferrous over nonferrous at this point in time.

The metal basket is cyclical in nature and one has to monitor the trends pretty closely in terms of how global commodity prices and how global demand and supply move. As long as the GDP growth trajectory stays intact globally and recovery is in place, some of these stocks and prices could hold up.

What about the auto space?
Auto is a sector where we have been fairly positive. It has done well in terms of recovery. Demand clearly has been improving especially in pockets which are catering to the lower end four-wheeler segment. Even the two-wheeler segment has been holding up. What is most important is that initially it was the rural demand that was supporting the overall auto recovery.

Incrementally, as the urban recovery starts to play out and you start to see mobility improve in urban centres as well, some of the urban demand is coming back and that is boding well for the entire sector as a whole. Overall we believe that consumer discretionary spends are clearly on the up move and as the consumer discretionary spends improve, auto is a beneficiary.

We have also started to see signs of premiumisation within various segments of the auto basket and that is likely to aid in terms of overall demand recovery in the sector. Overall, we are positive especially on the lower-end four-wheeler segment, the two-wheeler and the tractor segments.