I don't see another major FII-driven sell-off: Centrum Broking's Maheshwari

'Primary markets have had a long bull run, with many companies cashing in on the positive sentiment', said Maheshwari

Foreign portfolio investors (FPIs) continued to sell stocks in May, pulling out nearly Rs 44,000 crore from domestic markets. Nischal Maheshwari, chief executive officer for institutional equities at Centrum Broking, in conversation with Puneet Wadhwa says foreign investors expect the Reserve Bank of India (RBI) to toe the US Federal Reserve (Fed) line in keeping inflation in check. Edited excerpts:

Can markets now undergo time-wise correction?

Markets will continue to remain volatile in the near future since there are a number of factors at play. The Russia-Ukraine war is still inconclusive, with neither country backing down, leading to a surge in energy prices across the globe. Even before the war started, inflation in many countries had been rising due to supply-demand imbalances during the pandemic, prompting a tightening of monetary policy.

The recent lockdowns in China, restrictions on palm oil exports by Indonesia, and limited gas supply from Russia have caused fresh bottlenecks in global supply chains and galvanised record inflation in India.

Do you think markets are pricing in ‘too much’ central bank hawkishness?

Markets are justified in doing so. There is pent-up demand for a variety of services, such as travel and lifestyle, which were less accessible during the past two years. Moreover, rising input commodity costs have led to a surge in prices for goods and services across sectors. This is causing inflation to remain substantially high.

Additionally, the bottlenecks created due to the Russia-Ukraine offensive have further disrupted supply chains. This cycle is expected to continue for a few more months and will blunt earnings as well. Markets are pricing in this volatility.

To what extent are markets pricing in earnings downgrades over the next few quarters in the backdrop of rising input costs?

Markets have just started factoring in earnings downgrades. There will be more cuts along the way.

From an impact perspective, we have to look at certain sectors that are able to pass on price increases wherever demand-supply or capacity utilisation allows. But there are certain sectors that do not have the pricing power, given weak demand. Overall, it is going to be a negative hit on earnings. For 2022-23 (FY23), Nifty earnings should grow around 15 per cent.

What further response can foreign investors expect from the government/policymakers to cushion the impact of rising input cost?

Although India is still dependent on imports for energy and some food items, it is still better placed when compared to other emerging markets. Since controlling inflation is a priority, foreign institutional investors (FIIs) expect the RBI to toe the Fed line to keep it under control, driven by timely rate hikes and better monetary and fiscal policy coordination.

FIIs have appreciated the recent production-linked incentive (PLI) scheme to promote domestic manufacturing - the results of which should soon be visible. A similar scheme in sectors where India is a net importer will be beneficial. I don’t see another major sell-off driven by FIIs since India has a large domestic consumption market, and is well-supported by domestic institutional investors.

How soon will the primary market start to feel the heat of the secondary market?

Primary markets have had a long bull run, with many companies cashing in on the positive sentiment. However, we are now in a phase where valuations need to be more realistic, driven by macroeconomics and investor sentiment and not by multiples given by private equity firms. We have seen recent initial public offerings of technology/consumer companies open at discounts - many trading below their issue prices due to high valuations.

Companies seeking the primary market route have started realising this and are introspecting and deriving realistic valuations, while resizing the amount of capital being raised.

Has too much pessimism crept into metal, information technology (IT), and the automotive (auto) sectors?

These sectors witnessed consistent growth over the past few quarters and the correction is cyclical yet healthy. They are currently available at value prices. With a number of new automobile launches lined up and dollar prices rising, auto and IT should perform well. Metal will witness sustained recovery as the impact of export duties recently levied remains to be factored into their financials, but the outlook is positive.

Do you think manufacturing and capital expenditure (capex)-related sectors could remain laggards?

The government’s PLI scheme to attract capex has got a favourable response. However, it is a cyclical process. India is still in economic development mode. We are seeing growing geopolitical risks around the world and it is likely that estranged relationships between China and many advanced economies could be beneficial to India in the medium term. It is still early days to propose that these sectors will remain laggards.