Green Portfolio PMS founder Divam Sharma sees value opportunities in the large IT space. He also expects the rural theme to play out in the second half of the current financial year as elections near
The earnings season gets underway in the coming week and Green Portfolio PMS founder Divam Sharma has a checklist of three key factors that market participants should watch out for.
The guidance from the IT sector, which has had a rough run, and the results from the banking sector, which has been driving the markets, as any surprises there would not be taken well.
The third factor that Sharma, who has 13 years of investment management, would be tracking would be the margins for key manufacturing sectors. Edited excerpts of an interview:
We saw strong FII inflows in the last quarter. Do you expect them to continue in the coming quarters as well?
We believe that this is a long-term trend. The kind of robust flows that we are seeing despite the run in markets is assuring. This time markets have rallied with one of the lowest levels of participation from FPI. There is a catch-up happening, as India is clearly on top of every institution’s mind when it comes to allocating fresh capital.
While there could be some months where these flows would be volatile due to global events, the long-term trend should sustain. This allocation along with a reversal in interest rates could take valuations to very high levels.
Do you expect the current account pressure to be lower in the current financial when compared to FY23?
We expect a lower current account deficit, considering a lower import bill with softer commodity prices, particularly crude, which have been downbeat on the global growth concerns. The lower import bill implies that the country is expected to spend less on importing goods and services from other countries. This reduction in imports can help in narrowing the current account deficit.
As commodity prices, particularly crude oil, have been downbeat due to global growth concerns, it is likely that the cost of importing crude oil will be lower. This reduction in the price of crude oil, a significant component of imports for many countries, would contribute to a decrease in the import bill. While the services exports could be impacted in the FY, we expect the remittances to continue to remain robust.
What are the key factors to watch out for in Q1FY24 earnings season that gets underway in the coming week?
We would watch out for guidance coming in from the IT sector. We would also like to watch out for the banking sector results as the sector is currently driving the markets and any surprises there would not be taken well by the markets.
At the same time, we would also be watching out for the margins coming in from key manufacturing sectors, as there is improvement anticipated from softer commodity prices. Margins refer to the profitability of companies in the manufacturing sector, particularly in relation to the costs of production. The anticipated improvement in margins is attributed to softer commodity prices, which can potentially lower the input costs for manufacturers.
Do you still see value in the BFSI sector?
The BFSI sector continues to see a high allocation from FPIs. The high allocation indicates confidence in the sector’s growth potential and the investment opportunities it presents.
We are seeing some value picks across small private banks. India is a significantly expanding large economy and BFSI will be a key beneficiary of this growth. We are already seeing strength in the results across the sector while the broader valuations are also comfortable despite the run.
Are the midcap IT stocks looking overvalued?
It would be company specific. We believe that there are more value opportunities in the large IT space now. The sector has had its issues and we all know about it. We believe that the coming months will throw more opportunities to buy in this sector.
The market conditions or specific developments may create favourable entry points or investment opportunities in the IT sector. These opportunities could arise from factors such as positive industry trends, attractive valuations or company-specific growth prospects.
Do you foresee an earnings miss from IT companies in the June quarter as well?
We do not see positive surprises in this quarter. We will see a revenue impact coming in from a softer discretionary spending environment across the key markets. There would possibly be ramp-downs with lower conversion on total contract value.
We could also possibly see sector leaders tightening their revenue guidance. This indicates a more cautious outlook on revenue growth or a potential decrease in expected revenue levels.
Is it time to focus on rural ideas?
There are concerns around inflation impacting spending power and the monsoon, while there are positives around rural wage growth at 27-month high and NREGA demand being below pre-covid levels.
Next one year, we will see elections across some major states and the Centre. This will, however, have a positive impact on the rural economy. We could see a rural theme playing out in the second half of this FY.
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