Valuations clearly above long-term averages: Shibani Sircar Kurian

“Of course, IT as a sector has been underperforming for quite a while. So, if you look at the numbers that have come out from three major IT companies, the numbers by and large by themselves have been largely in line with estimates,” says Shibani Sircar Kurian, Kotak Mahindra Asset Management.

Have to talk about IT, does it come as a surprise that the market is actually willing to give the sector the benefit of doubt that maybe the worst could be behind with Q1?
Of course, IT as a sector has been underperforming for quite a while. So, if you look at the numbers that have come out from three major IT companies, the numbers by and large by themselves have been largely in line with estimates. Management commentary too has been somewhat cautious in terms of calling out improvement, at least in the near term. I think one key factor that really stood out was that the deal-win trajectory in most of the companies that have reported numbers have remained fairly resilient. So, what that possibly is showing us is that while client decision-making cycles have been elongated and conversion from deal to revenue is also taking time, but overall, the momentum, at least in terms of the medium-term outlook from most of the clients remains fairly positive and remains intact.

And therefore, that is why you are starting to see numbers in terms of the deal wins remaining largely intact. Near term, of course, even in the next quarter, we will possibly have to contend with muted growth outlook. And it is possible maybe towards the second half of the year, the expectation at this point in time is that we will start seeing possibly some improvement in terms of the revenue momentum.

If you look at the way the sector has behaved, the overall midcaps clearly have outperformed the large caps. From a valuation perspective, we clearly find that large caps are considerably better placed both in terms of the current operating environment as well as from a valuation angle. And therefore, in terms of our overall pecking order in the sector, it is large caps over midcaps. In midcaps at current valuations given the kind of run-up that we have seen, we would be somewhat selective.

Your take as far as the entire consumption basket is concerned.
So, within the consumption basket, what we have continued to see is that the overall consumption momentum and demand has been K-shaped, where clearly the premium segment has performed better while the rural segment has been lagging.

Also, within the discretionary consumption basket, at the margin, especially in segments such as, for example, durables, we have started to see some slowdown in terms of the demand momentum.

Therefore, if you look at the overall consumption space at this point in time between discretionary and staples, our preference has been for staples. A couple of things here; One, of course, on the rural demand side, and this is something that we have discussed on your channel before, that rural demand momentum seems to be improving at the margin.

What we have started seeing is that after a long period of time, real rural wages have started to move up and therefore that should hopefully support the rural demand revival, albeit at a fairly gradual pace. So, we are not expecting a sharp recovery, but at least things seem to be bottoming out. Secondly, from a staples perspective, if you look at margins, margins should start to improve primarily because of input cost pressures coming off. And therefore, we believe that at this point in time staples is preferred over the discretionary consumption space.

What is your take as far as the market goes? Do you think that 20,000 can come in a hurry or one has to wait for the earning season to play out, the monsoons to play out before we see those high levels?
Obviously it has been a great run for the markets and what has clearly stood out for us has been the fact that despite a lot of fear and trepidation, earnings have actually held up so far.

And earnings have been one of the key drivers for our markets apart from, of course, flows and the improving macro environment. Now a couple of things we have seen is that even at a broader market level, the earnings revision cycle appears to be bottoming out.

And therefore, if earnings are able to hold up and we are able to see delivery on earnings. So if you look at Nifty, for instance, over the next couple of years, for FY24 and FY25, the expectations are of mid to high teens earnings growth. And if that earnings growth is delivered, I think then markets can move up. However, valuations clearly are above long-term averages.

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