Get ready to navigate near-term volatility; better to stick to largecaps: Shibani Sircar Kurian

“For a lot of companies which have taken price hikes, margins should start bottoming out in this quarter and we should possibly start seeing margin improvement go through for the auto sector as a whole specifically on the passenger vehicle side,” says Shibani Sircar Kurian, Senior EVP, Fund Manager & Head -Equity Research, Kotak Mahindra Asset Management.

What is your view as far as the market is concerned? Will the rest of the year continue to be led by the largecaps or will the midcaps also catch up because in the last two to three weeks, the midcaps have been underperforming?
When you look at the markets as a whole, given that there are multiple global macro factors at play as also higher interest rates and inflation which is likely to be sticky especially where the US and European geographies are concerned, we should be prepared that in the near term, the markets could continue to see some degree of volatility.

As you rightly pointed out, the Indian growth outlook remains fairly stable and has been an outlier which has been driving the outperformance of Indian markets. When we look at valuations, we should take note of the fact that Indian markets today are trading at multiples on a relative basis where the premia is at an all time high level.


That leads us to believe that we will have to navigate some near term volatility. In terms of our preference, at this point in time, largecaps continue to be better placed than midcaps, especially in the near term, given that we could see some degree of volatility in the markets.

In the medium term, given the growth outlook as well as corporate earnings trajectory which we think will remain fairly stable for India, we would look at midcaps but more from a bottom up basis. In fact, our entire approach to portfolio composition today has been largely bottom up in nature where there will be wide dispersion across sectors and within sectors, across stocks and therefore high growth, high quality companies trading at reasonable valuations is the way to go to possibly navigate some of this near term volatility.

What is the market chatter around this out of turn MPC meet and whether or not we should brace ourselves for another rate hike?
Where interest rates in India are concerned, one must take a look at what is happening with inflation. Of course, the latest reading with inflation has seen an uptick where CPI is concerned but the WPI inflation numbers have come off month on month basis.

A lot of the inflation on the CPI front has been driven by food prices. If we look at RBI’s own projection on inflation going into the first quarter of FY24 and then for FY24 as a whole, clearly they are looking at inflation coming down within their tolerance band which is that 4% plus/minus 2%. Therefore, our belief is that inflation should be close to topping out and from here on, we should start seeing some degree of moderation and by the fourth quarter of FY23 and the first quarter of FY24, inflation should settle somewhere within RBI’s tolerance band.

Therefore, while in the near term, one could see interest rate hikes, we do not believe that RBI would be significantly aggressive in terms of interest rate hikes. Of course, the joker in the pack would be what the Fed does, but at this point in time, we are building in possibly one more rate hike and then depending upon how the global macro and global central bankers proceed from here on in terms of their own interest rate scenario, Indian policy rates would follow them.

What is your take regarding Maruti and the entire passenger vehicle segment?
Without commenting specifically on a company, if you look at the margin outlook, clearly what we had been anticipating is that this quarter too we would see some amount of margin impact, primarily because of the elevated commodity cost pressures and the impact that started to be seen in the first quarter and most of that coming through the second quarter.

Now for the auto segment as a whole, what we have seen, especially during the festive season, is that demand for passenger vehicles has been extremely strong and therefore as commodity cost inflation starts to peter out, we will start seeing operating leverage starting to play through. Across the board, after a very long period of time, we have seen demand growth coming back in the auto space both for passenger vehicles and even at the margin for the two-wheeler segment.

Also remember that unless and until commodity costs go up in a meaningful manner from here on, for a lot of companies which have taken price hikes, margins should start bottoming out in this quarter and we should possibly start seeing margin improvement go through for the auto sector as a whole specifically on the passenger vehicle side.

Finally, companies which have a strong product pipeline or which have had strong product launches should also benefit from the demand uptick that we are seeing. So overall, we have been fairly positive on the automobile space with our preference being for the passenger vehicle followed by two wheelers.