'Markets have not hit the bottom yet; select banks, autos attractive'

Direct impact of rising interest rates might already be discounted by the markets, but secondary impact is not yet fully priced in, says Varun Lohchab, head of institutional research, HDFC Securities

Though the Indian markets saw record foreign inflows of Rs 2.7 trillion in FY21, the overall net inflow stands only at Rs 1.1 trillion in the last seven years. VARUN LOHCHAB, head of institutional research at HDFC Securities, tells Lovisha Darad in an interview that the direct impact of rising interest rates might already be discounted by the markets, the secondary impact is not yet fully priced in. Edited excerpts:

FIIs have sold nearly Rs 2 trillion worth of equities so far in 2022. By when do you expect this to stem? Does India offer any silver lining as compared to the other EMs?

In spite of record foreign inflows amounting to Rs 2.74 trillion in FY21, the overall net inflow is only Rs 1.17 trillion in the last seven years. We believe that the opportunistic foreign players that entered the markets in fiscal 2022-21 (FY21) have booked profits and exited, leaving only long-term foreign investors, who believe in India’s structural growth story. Though the MSCI EM index has declined 25 per cent, Nifty50 has remained resilient as it has declined only 2 per cent, backed by domestic investors and SIP flows.

Global economies are front-loading rate hikes in order to tame inflationary pressures. How far have markets digested the rate action?

While the direct impact of rising interest rates might already be discounted by the markets, the secondary impact is not yet fully priced in. Few rate sensitive sectors will witness muted consumption demand as the effective cost of these products go up. Going ahead, we do not expect any significant decline unless there is a large deviation from global central banks’ quantum or pace of rate hikes.

With the Indian rupee hitting a fresh record low against US dollar, is the time ripe to pick export-oriented sectors like IT, pharma or textiles?

While the Indian rupee has depreciated 6 per cent against the US dollar in a year, it has appreciated 9 per cent against Euro and GBP, during the same period. Hence, the mixed behaviour of currency pairs signifies no clear benefit to export-oriented sectors. We believe that picking stocks solely based on currency movements would not be prudent and fundamental aspects should be taken into consideration. Also, we expect moderate downward pressure on the domestic currency to continue as global central banks hike rates. However, India’s $602 billion foreign exchange reserves at $602 billion will act as a cushion against the rupee’s fall.

Will companies defer their listing plans and look at alternate sources of fund raising amid market volatility?

Companies tend to wait for favourable market conditions, which is not the situation currently. The relentless FII selling in the Indian markets for the past 7 months suggest cautious mind-set of investors. It will not be surprising to witness few companies deferring their listing plans in the short-term and revisiting the same when the environment is more conducive. The markets will not be as sanguine in FY23 for primary listings as it had been in FY22.

Is this the correct time to bottom-fish in the markets?

No, the markets haven't reached a bottom yet. However, the recent market correction has provided some interesting pockets for investment. We believe the auto sector is on the cusp of recovery. We also expect metal prices to soften and improve gradually over the few quarters. Large banks with healthy CASA ratios are likely to benefit in a rising rate scenario. That apart, the Indian chemical industry will benefit as global supply chain diversification buoy higher capex levels in the domestic market.

To what extent will all these developments dent India Inc's fortunes in FY23?
 

As per our analysis, oil and gas, metal, BFSI and IT contribute 75 per cent of the corporate profit pool. We expect all three counters to remain steady, ultimately, keeping the profit pool stable in FY23, despite adverse inflationary environment. Though higher inflation is eating margins of cement, FMCG, pharma, and chemical companies, we expect them to pass these costs to consumers in a calibrated manner over the medium-term.