Earnings growth will be in double digits, prefer value stocks at this juncture: Satish Menon of Geojit Financial Service

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Strong FDI inflows, rise in exports, the revival of domestic demand and ongoing reforms will lead to a robust outlook for Indian corporates with earnings maintaining double-digit growth, says Satish Menon, Executive Director at Geojit Financial Services in an interview with Nishant Kumar of Mint Genie.

Edited excerpts:

What is your outlook for the market for FY23 in light of factors such as rising input costs of companies, geopolitical issues, and policy normalisation?

We have a constructive view of the market because the broad market is attractive from a short to medium-term perspective. 

This is based on our firm belief that the earnings growth will be at a double-digit level on the back of the macroeconomy maintaining a higher growth rate. 

However, investors will have to be cautious about some of the stocks and sectors forming part of the main indices, which are currently trading at the upper band of the historic valuations matrix. 

Downside risk to future earnings growth is increasing due to high-cost inflation, increase in crude oil price and escalating geopolitical tensions. 

For instance, consumer price inflation is currently above the RBI’s comfort level of 6 percent. However, the inflation print may come down once the crude prices cool off and supply bottlenecks ease.

The economy is showing mixed trends. GST collections are hitting record highs but many rating agencies such as ICRA and Fitch have lowered their growth forecast. What is your take on India’s macro?

Constant price hikes, strict compliance and re-opening of the economy helped in the record-breaking GST collections. 

However, supply constraints and high inflation – both CPI and WPI inflation – impacted GDP growth. 

India is expected to grow at a consensus estimate of 7.5 percent during the current fiscal maintaining its position as one of the fastest-growing large economies. 

This is despite the multilateral agencies and credit rating agencies lowering their global growth forecast. 

The key to the future growth momentum lies in the assumption that inflation will moderate on a medium-term basis in anticipation of an end to the Russia-Ukraine war, reduction in supply constraints and easing oil prices. 

Strong FDI inflows, a rise in exports, the revival of domestic demand and ongoing reforms will maintain a robust outlook for Indian corporates with earnings maintaining double-digit growth.

What can be the ideal portfolio at this juncture? Would you recommend trimming exposure to equities amid the prevailing uncertainty?

The consolidation and resilience of the Indian market during the last five to six months have improved the attractiveness of domestic equities. 

Stock prices and the valuation of the broad market have moderated. Based on Nifty500 index data, more than 50 percent of the stocks were trading below their 200-day moving average as on March 31, 2022. 

Our rating on the broad market has improved and investors may increase exposure to mid and small caps in a short to medium-term, focusing on a stock-to-stock basis. 

The right strategy to follow in the current market setup is to go for bottom-up stock picking without throwing caution to the wind.

What does the HDFC-HDFC Bank merger mean for shareholders?

It is a win-win situation for both the shareholders, but HDFC Ltd shareholders can have an edge since it is merging with a faster-growing company, getting access to cheaper funds and gains from cross-selling of products. 

The merged entity can leverage its synergies to fuel future growth in its core business verticals. On the whole, the merger is positive for the stock and shareholders.

What is your medium-term (one year) view on HDFC Bank’s stock?

We continue to have a buy rating. We are forecasting a rebound in credit growth and yields. Valuations are attractive because it is trading below long-term averages. 

Valuations will improve in the future due to merger benefits and the lifting of RBI’s regulatory curb on digital initiatives and the credit card business. 

It all depends on getting the requisite approvals in time to complete the merger.

The debate over value versus growth stocks is now gaining momentum with many suggesting it is the time for value stocks. What do you prefer currently- value or growth stocks?

Today, we prefer value stocks because the valuation of the main market is elevated which may not be sustained on a long-term basis. 

The performance of growth stocks that are trading at supreme valuations will be muted. However, the broad market has consolidated in the last five to six months. 

Markets will assess the stocks and sectors, based on the valuations, earnings growth, and business outlook to direct future performance. 

Also, value stocks have been trading cheaper for quite some time based on many matrices and they are the best buys during episodes of high inflation.

First published in Livemint.com

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