Second half of FY23 is likely to see higher earnings growth: Swati Kulkarni

Amid the ongoing market correction, the premium of Nifty Mid Cap 100 Index valuation to Nifty 50 Index valuation is higher at 12 per cent, as against the last 10 years’ average of 5 per cent, suggesting that the large-caps are relatively attractive, says SWATI KULKARNI, executive vice-president & fund manager for equity at UTI MF in an interview with Puneet Wadhwa. Edited excerpts:

Do you think 2022 could see negative returns from the frontline indices?

Most of the expectations that we were discussing last year around monetary tightening, sticky inflation, slowing global growth etc. have started to play out. The unforeseen geopolitical conflict further worsened the inflation and supply side disruption. High valuations, one standard deviation above the 10-year average price-earnings (PE) – also did not leave any room for support. Market gave up around 13 per cent off its peak to hover back to levels seen in August 2021. The silver lining is that the earnings growth for fiscal 2021-22 (FY22) has been strong on low base despite margin headwinds for the last few quarters.

Are valuation at the current levels in your comfort zone?

The valuations at 16,250 Nifty50 level are looking more reasonable for large-caps, trading near the 10-year average trailing PE multiple of 21 times. The premium of Nifty Mid Cap 100 Index valuation to Nifty 50 Index valuation is higher at 12 per cent, as against the last 10 years’ average of 5 per cent, suggesting that the large caps are relatively attractive.

Are the March 2022 quarter numbers of India Inc adequately reflecting the inflation-related pain?

Of the Nifty 50 companies that have reported so far, the profits grew by 26 per cent over the quarter ended March 2021, led by the Banking and Financial Services (BFSI) sector. Reported results indicate persistent pressure on margin coming from raw material price/ wage inflation. Companies have been passing on the inflation gradually. In addition to monetary tightening globally, if the geo-political situation and supply disruption improves, the expected slowing global GDP growth in 2022 could soften the commodity prices further. Thus, the second half of FY23 is likely to see higher earnings growth.

Sectors that can be the dark horse(s)?

The Bloomberg Consensus earnings per share (EPS) growth estimate for Nifty50 for FY23 is at 17 per cent. We can see a possible earnings growth revival in the automobile sector if the raw material pressure softens and semiconductor availability improves. The companies in the sector could then register higher volume growth leading to operating leverage benefits.

What has been your investment strategy this far in 2022?

Our preference for companies that generate operating cash flows consistently and are low on debt could guard the portfolio against rising interest costs. We have increased exposure to banks with low cost CASA deposits, as they are expected to benefit from the rising interest rates. We are overweight on automobile, consumer services, industrial manufacturing, pharma, telecom, information technology (IT); underweight on oil & gas, fast moving consumer goods (FMCG), power and metal sectors.

If the markets were to stage a recovery, where do you think the leadership will emerge from?

While most beaten down sectors technically recover first, it is more sustainable for fundamentally strong sectors. For e.g., amidst the near-term revenue growth concerns, the IT sector had an attractive valuation advantage and outperformed through 2017-2022. The leadership could emerge from the large private banks with improved balance-sheets.

Do you think retail investors will continue to put in money in domestic equities despite the challenges?

Virtuous part about the retail investors’ participation in Indian equities, is their growing preference for investing in Mutual Funds through monthly SIP, which we believe is more structural. The ongoing market correction will encourage them to choose investing through MF over short-term direct equity trading. Despite a global slowdown affecting the country's export growth, India shall remain among the highest growing economies due our domestic demand potential and will remain an important investment destination for foreign investors.