Interest rates have peaked; positive on India’s long-term story, says Shreyash Devalkar of Axis Mutual Fund

Shreyash Devalkar of Axis Mutual Fund believes India remains on a medium to long-term growth trajectory with some periods of consolidation. He says investors should have exposure to all three segments - large, mid, and small-caps.

Nishant Kumar
Updated16 Oct 2023, 04:53 PM IST
Shreyash Devalkar, Head of Equity at Axis Mutual Fund
Shreyash Devalkar, Head of Equity at Axis Mutual Fund(Axis Mutual Fund)

Shreyash Devalkar, Head of Equity at Axis Mutual Fund is positive on India’s long-term story even as he believes elevated US treasury yields and the impending slowdown globally could weigh on Indian equities in the short to medium term. In an interview with Mint, Devalkar shares his views on markets and his expectations from Q2FY24 earnings.

Edited excerpts:

What is your assessment of the current market sentiment? When do you expect a fresh all-time high for markets?

Indian equities have seen remarkable performance compared to global major indices. 

Global geopolitical uncertainties are here to stay, and the outcome of that is the restriction on the free flow of capital and goods across geographies. 

This change in recent years has contributed to inflationary pressure and higher interest rates. 

This outcome is affecting global economic growth, while in India's context, the higher commodity prices (especially crude oil) have a bearing on economic growth and profitability. 

We believe that India remains on a medium to long-term growth trajectory with some periods of consolidation.

What is the outlook for the mid and small-cap space? Can they sustain gains?

The midcap and small cap segment indeed has seen a sharp rally for most of this year. 

Consequently, the valuations of stocks are way higher than their pre-Covid level and are at a premium to large-cap companies. 

Mid and small-cap space has more representation of B2B (business-to-business) companies having exposure to investment and exports part of the economy. 

The underperformance of consumption compared to investment and export has helped the rally in mid and small-cap. 

With the expectation of a global slowdown, one needs to be careful with the exports-oriented segment, though the investment part of the economy continues to do well. 

In such a scenario, one may not extrapolate the past performance of these categories. 

We are of the view that rather than worrying about which segment to move into, investors should have exposure to all three segments. 

The large, mid, and small-cap segments are complementary to each other rather than competing with each other.

RBI maintained a status quo on the repo rate and policy stance after the October meeting. But the tone of the governor remained hawkish. Should the market be worried?

We believe that the interest rates have peaked in India and globally as well. However, interest rates could remain higher for longer globally given inflationary risks and the current rise in oil prices and ongoing geopolitical risks. 

Elevated US treasury yields and the impending slowdown globally could weigh on Indian equities in the short to medium term but overall, we remain positive on India’s long-term story.

What are your expectations from Q2FY24 earnings? Do you expect some negative surprises?

The result seasons are expected to be reasonably good across sectors like auto, banks, capital goods, construction materials, etc. 

We expect results to be in line with consensus estimates that are rising EBITDA margins coupled with moderate top-line growth. 

There is always a surprise element, which comes with a results outlook, and we wouldn’t be surprised if some sector doesn’t do well on that front.

Also Read: Stocks to buy this week: RIL, DMart, Tata Consumer, Sobha among 12 technical picks; do you own any?

What are your views on the IT sector? Is the worst over for them?

The IT sector has seen muted growth, particularly in top IT/tier-1 names. 

Continued rationalisation of discretionary programs, combined with extended timelines for the execution of existing ones, is leading to leakage of revenues and weak trends. 

The weakness will be broad-based and amplified in segments of banking, retail, and telecom. 

Additionally, the slowdown in growth rates and cut in discretionary programs, combined with an increase in costs such as travel and back-to-office expenses, will impact the segment. 

However, on a relative basis and especially adjusting for high-quality FCF generation along with dividend distribution, the valuations are relatively reasonable, though it’s higher than historical averages.

Also Read: IT sector still a good bet after lacklustre earnings? Here's what experts say

What sectors should retail investors look at now? Can recent outperformers such as banking and automobiles still go further?

More than taking a top-down approach, the important aspect for retail investors is to maintain discipline and stay invested. 

Markets have had a sharp run in the last few months and valuations currently seem stretched. 

One may remain cautious about export-oriented sectors, due to slowdown concerns. 

The investment part of the economy and associated companies are expected to continue to good growth. Stock selection will hold the key in these markets. 

Investors can use this period of consolidation to rebalance portfolios as we play longer-term themes. 

Banks could witness a moderation in earnings growth. This is largely on account of compression in NIMs (net interest margins) as the impact of deposit rate hikes starts to reflect in the top line for the banks. 

However, the sector has already derated on these concerns. The automobile sector is likely to benefit from retail demand in light of the festive season. 

A combination of price hikes, mix improvement, raw material cost reversal and improved operating leverage will work well for this sector. 

Ancillary players with a dependence on OEM (original equipment manufacturer) volume growth are expected to deliver decent revenue growth.

Also Read: Nifty Realty up 42% this year so far; DLF, Prestige Estate jump over 50%; can realty stocks rise further?

Read all market-related news here

Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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First Published:16 Oct 2023, 04:53 PM IST
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